An Overview of Qualified Plans:
We perform administration primarily on qualified plans. Being “qualified” allows these plans to have tax-deductible contributions. Below is a brief overview of the different types of qualified plans we administer:
Defined Contribution (DC) Plans:
- This is the most common type of plan (e.g. 401(k)-type plans). Good for larger employers, or those wanting to provide an even benefit for all owners and participants. Also good for providing different benefits to owners, such as new comparability design like hybrid plans.
- Based on the contribution, not the final benefit. Profit Sharing portions of plan allow for 0-25% of pay, generally speaking, given to participants (can put different people in different groups getting varying percentages of the contribution, based on different job classifications or other factors).
- 401(k) contribution up to $19,500 in 2020; catch-up contribution in addition up to $6,500 for participants age 50 or older.
- Types of DCs:
- Profit Sharing
- Profit Sharing/401(k)
- Profit Sharing/Roth 401(k)/Traditional 401(k)
- Money Purchase
Of those plans, we can offer various contribution percentages and allocation groups. These plans may be ADP/ACP tested, offer safe harbors or qualified match contributions (such as single, double-stack or triple-stack hybrid plan options).
Defined Benefit (DB) Plans:
- This is the most misunderstood qualified plan, but the best plan for large contributions
- Contributions can be upwards of $250,000 per year for an owner (given the right age, salary and employer demographics)
- Contributions must fund in a “parabolic” manner (i.e. smaller contributions to fund benefit for young employees; larger contributions to fund benefit for older employees or owners)
- Great plan design for professional service organizations (i.e. doctors, attorneys, dentists, etc.) or any business owner with a larger wage who has younger employees
- Types of DBs:
Combinations and Arrangements of Qualified Plans:
- Hybrid Plans: Like hybrid cars, hybrid plans get more “mileage” out of their initial design to accomplish special goals for owners. They “act” like a different plan than their legal type to help meet goals better.
- Cash Balance Plans: Technically, these are DB plans, but can operate like a DC in that they give account statements to participants like a 401(k) helping better communicate the benefit to employees. Additionally, Cash Balance Plans can often meet goals better for two owners who have large gaps in age. Under a Cash Balance Plan, contributions can be tailored to give a similar dollar amount to each owner.
- New Comparability 401(k) Plans: These DC plans are “tested” like a DB plan, so contributions are skewed towards older employees or owners helping get more “mileage” out of the contributions for owners.
- Floor off-set DB/DC Combination Plans: This type of design combines a DB and a DC plan to use the DC plan contributions to provide a “floor” of benefits under the DB plan from assets in the DB plan helping reduce the contribution necessary for the DC plan.
- Integration with Social Security: Using wage bases from Social Security, we can help create a larger benefit for higher earners.
- DB or DC Excess Plans: These plans allow for making up for the lack of Social Security benefits past the taxable wage base. Excellent design for benefiting highly compensated employees or owners further.
- DB or DC Off-set Plans: These plans take away benefits based on Social Security already earned helping to create more benefit under the plan for those who have fewer Social Security benefits as their salary increases.
- Combination Plans: These plans help utilize the basic goals of both DB and DC plans. Additionally, for employers who want to allow employees an opportunity to contribute, adding a DC component to a DB plan accomplishes this goal.