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Maximizing Deferral and Match

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  • Maximizing Deferral and Match

    Our office started a 401k Plan for 2017 on Oct 1st and there are only 6 pay periods left. What is the best way to maximize 18K deferral and employer match (3.5% of the first 6% deferral) and potentially for 2018. I am the employer and have 5 other employees that are participating in the plan and I have the flexibility to add bonus to my pay to increase my compensation.

    Thanks

    HI

  • #2
    If you can swing it, I'd just do $3k per pay period this year and then spread it out evenly next year. I like the mental part of not knowing what your paystub would look like without the withholding.

    Comment


    • #3
      Is there a particular reason why you have a 3.5% match on the first 6% of compensation? This is not a safe harbor employer match.

      Without a safe harbor plan, unless all employees are HCEs, it is virtually guaranteed that the plan will fail ADP testing and a portion of your $18K will be an excess contribution and it and earnings will be returned.

      Comment


      • #4




        If you can swing it, I’d just do $3k per pay period this year and then spread it out evenly next year. I like the mental part of not knowing what your paystub would look like without the withholding.
        Click to expand...


        so does the government. 

         

        Comment


        • #5




          Is there a particular reason why you have a 3.5% match on the first 6% of compensation? This is not a safe harbor employer match.

          Without a safe harbor plan, unless all employees are HCEs, it is virtually guaranteed that the plan will fail ADP testing and a portion of your $18K will be an excess contribution and it and earnings will be returned.
          Click to expand...


          It is a QACA safe harbor plan. 100% match on the first 1% deferral and 50% match on the next 5% deferral.




          If you can swing it, I’d just do $3k per pay period this year and then spread it out evenly next year. I like the mental part of not knowing what your paystub would look like without the withholding.


          For example the max compensation in consideration can be $270,000 and 6% of it is $16,200. So I have to defer more than 6% to reach $18,000 limit. If I  compensate myself $45,000 per pay period to make that $270,000 and deferring $3K to reach the $18K deferral, I might be able to maximize the employer match and pay required taxes on the $42K. If I already paid enough federal/state estimated taxes for 2017, can I say zero federal withholding for the rest of the year and just pay FICA taxes?

          Thanks.

          HI

          Comment


          • #6
            Ok, that makes sense now, QACA safe harbor 401k plans are not that common.

            Did your TPA mention a New Comparability Method profit sharing option? Depending on the census of your employees, you might be able to max out the $54K annual addition limit.

            Instead of an employer match, you make non-elective employer contributions. A minimum of 3% is required in a safe harbor 401k plan. This allows a larger contribution percentage for a class of Employees (you) than other class(s) of employees (everyone else).

            This would allow you to make a $36K employer contribution in addition to the $18K deferral. The plan must be cross-tested and the other employee's contributions may be > 3%, but it will allow a much larger employer contribution for you.

            Comment


            • #7







              Is there a particular reason why you have a 3.5% match on the first 6% of compensation? This is not a safe harbor employer match.

              Without a safe harbor plan, unless all employees are HCEs, it is virtually guaranteed that the plan will fail ADP testing and a portion of your $18K will be an excess contribution and it and earnings will be returned.
              Click to expand…


              It is a QACA safe harbor plan. 100% match on the first 1% deferral and 50% match on the next 5% deferral.




              If you can swing it, I’d just do $3k per pay period this year and then spread it out evenly next year. I like the mental part of not knowing what your paystub would look like without the withholding.


              For example the max compensation in consideration can be $270,000 and 6% of it is $16,200. So I have to defer more than 6% to reach $18,000 limit. If I  compensate myself $45,000 per pay period to make that $270,000 and deferring $3K to reach the $18K deferral, I might be able to maximize the employer match and pay required taxes on the $42K. If I already paid enough federal/state estimated taxes for 2017, can I say zero federal withholding for the rest of the year and just pay FICA taxes?

              Thanks.

              HI
              Click to expand...


              If you are the owner, and you have a handful of employees, is there a reason why you are not doing full profit sharing?
              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

              Comment


              • #8
                I was only discussing the employee contribution.  Agree with the others that profit sharing seems like a reasonable setup to get from ($18k + match) to $54k.

                Comment


                • #9




                  I was only discussing the employee contribution.  Agree with the others that profit sharing seems like a reasonable setup to get from ($18k + match) to $54k.
                  Click to expand...


                  That's not always possible, but I'd venture a guess that with 5 employees and one owner it can be possible, however, this all depends on the salaries and ages of these employees.  The only way to really know whether full profit sharing is cost-effective is with a design study, and I'm assuming one was done to ascertain that profit sharing is too expensive.
                  Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                  Comment


                  • #10




                    Ok, that makes sense now, QACA safe harbor 401k plans are not that common.

                    Did your TPA mention a New Comparability Method profit sharing option? Depending on the census of your employees, you might be able to max out the $54K annual addition limit.

                    Instead of an employer match, you make non-elective employer contributions. A minimum of 3% is required in a safe harbor 401k plan. This allows a larger contribution percentage for a class of Employees (you) than other class(s) of employees (everyone else).

                    This would allow you to make a $36K employer contribution in addition to the $18K deferral. The plan must be cross-tested and the other employee’s contributions may be > 3%, but it will allow a much larger employer contribution for you.
                    Click to expand...


                    Yes what I have is a QACA plan with Profit Sharing. I intend to use the profit sharing component to reach the 54K portion. However if I max the 18K deferral + 3.5% match then the profit sharing would be less.

                    Comment


                    • #11







                      Ok, that makes sense now, QACA safe harbor 401k plans are not that common.

                      Did your TPA mention a New Comparability Method profit sharing option? Depending on the census of your employees, you might be able to max out the $54K annual addition limit.

                      Instead of an employer match, you make non-elective employer contributions. A minimum of 3% is required in a safe harbor 401k plan. This allows a larger contribution percentage for a class of Employees (you) than other class(s) of employees (everyone else).

                      This would allow you to make a $36K employer contribution in addition to the $18K deferral. The plan must be cross-tested and the other employee’s contributions may be > 3%, but it will allow a much larger employer contribution for you.
                      Click to expand…


                      Yes what I have is a QACA plan with Profit Sharing. I intend to use the profit sharing component to reach the 54K portion. However if I max the 18K deferral + 3.5% match then the profit sharing would be less.
                      Click to expand...


                      Sometimes a 3% non-elective works just fine.  Only a design study can tell you which design will work better in terms of employer contribution, and even then it all depends on whether staff participates and how much they contribute, so we always do either a 3% non-elective or a 4% match.  If nobody participates it does not really matter, you would still need to give everyone enough profit sharing to pass the testing.  If everyone participates, then a 3% would be the cheapest design, though not by much.  Also it does matter whether the cross-tested design is optimized vs. using the same formula every time.  Not everyone does a custom design every year, and this can make a big difference.
                      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                      Comment

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