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Setting up safe harbor 401k with 6% match?

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  • Setting up safe harbor 401k with 6% match?

    I have a s-Corp with 5 employees along with me the owner. We set up 401k with paychex our payroll company. Currently 100% match for first 3% and 50% match for next two percent.

    My employees make between $30-45k/yr. only two participate in the plan.

    Was thinking of increasing match to 6% for 100% match of first 6%.

    Is this possible? I have my w2 income set at 130k for 2017 and likely 180k for 2018.

  • #2
    You can always increase the match, but you can't do it this year because you have to amend the plan doc and give the staff 30 day notice. Also, you might be out of luck for 2018 as well given the deadlines. Questions like this are better answered by an independent TPA who can help make sure that your plan document is amended in a timely fashion (which is what it would take to make this happen). There are other types of matches that the TPA can discuss with you that make the testing a bit more complex. And I would also not recommend paychex as a Third Party Administrator (TPA) because they are not going to provide you with good proactive advice, and they are known for making lots of mistakes. They will also not be able to accommodate more complex designs.

    If you have a 6% safe harbor match, this might actually work (provided you don't do any profit sharing), so anybody who does not contribute will not need to get an extra match.  But if they do, they will, so this might not work if everyone decides to participate.

    Alternatively, you can do a design with profit sharing, and depending on demographics this might work out better than the match. The trick is that every practice demographics is different so trying to guess the best design for your practice is pointless.  The best way to proceed is to run multiple illustrations with various plan designs and to compare those side by side.  You will need to account for any potential changes in demographics as well, since plan design for small practices is notoriously unstable and can change year to year based on who's eligible for the plan. Based on this design study you can then select the best design going forward.  You can certainly change your design year to year, but you can't go from a more generous to a less generous match during the year (you can however go from a less generous to a more generous one), and you have to give enough notice and update the plan document to make the changes.

    Eventually, when your net profit is high enough you can potentially use the profit sharing design (that usually works best with a 3% non-elective or a 4% match), and for that you will quickly find that paychex is not going to do a good job doing those cross-tested illustrations for you, so hiring your own independent TPA is going to be important going forward. A good TPA will run design studies on an annual basis to make sure that your plan design is optimal and that your W2 is set properly to maximize your contribution and to minimize employer contribution (in the case of profit sharing design).

    Payroll integration is not a good enough reason to use paychex in my opinion - in fact, all record-keepers make it very easy to make contributions nowadays, and I don't believe that paychex makes it easy to use an outside TPA to work on their plans and to make changes to their plan document, so for that very reason I don't recommend using paychex as a record-keeper either. You can, of course, try to work with paychex on this, but you have to be very knowledgeable and understand exactly what has to happen.  Other than that, an outside TPA is your best bet.

    EDIT: This one was a tough one, and I got it wrong the first time.  I actually had to consult a TPA because the details get very tricky due to such an abundance of options for 401k plans.  One more time this underscores the need for working with a high quality Third Party Administrator.
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees