In January NEFI published a Regulatory update regarding the passing of the SECURE Act and highlighted the items most NEFI members will need to respond to.

This monthly article will continue to provide NEFI members with helpful and timely information regarding employee retirement benefits. Our goal is to educate and update through short and concise newsletters that can be quickly read but leave you the business owner better informed.

401(k) Plan Design 

I had two recent conversations with NEFI members that I think might provide helpful insight to other members.

In the first conversation, the business owner asked me why he was told he would not be able to contribute the maximum of $19,000 into his personal 401k account.

The short answer is, his employees are not contributing enough and the plan he is using would become “Top-Heavy” in the eyes of the IRS. Top-Heavy means the plan assets cover certain participants more than others. Unfortunately, this is a common occurrence for many small to mid-size businesses across all industries and in this situation results in the owner’s retirement savings being reduced.

To avoid that situation an employer may want to consider a Safe Harbor 401(k):

Safe Harbor 401(k): 

Benefit: This plan structure ensures all Highly Compensated Employees (HCEs) are able to contribute the maximum salary deferral of $19,000 ($25,000 if over age 50), regardless of how much other plan participants save.

Details: To achieve that maximum salary deferral the company must do a 3% contribution for all employees, which vests immediately. This eliminates IRS testing and eliminates the risk of your plan becoming “Top-Heavy”.

Another NEFI member was concerned about their company match. He explained he is interested in rewarding his family members who work for the company and his senior managers. However, he did not want to increase the match to every single employee because of high turnover and some seasonal employees. He wants to reward loyal valuable employees.

Profit-Sharing Plans:

Benefit: To provide the owner the discretionary ability to contribute additional funds into employees’ retirement accounts. The employees can be broken out into classes (Family Members, Managers vs. Rank and file employees). When the company has a good year, employees can benefit. However, it is not required to occur, it is up to the owner. Additionally, the maximum salary deferral including profit share tops out at $56,000 per year. This can be particularly helpful for business owners looking to maximize their retirement savings.

Details: The IRS code states, “contributions must be substantial and recurring.” However, it does not clarify what “substantial” or “recurring” means giving business owners a lot of flexibility. Unlike the Safe Harbor, profit-sharing contributions can be set on a vesting schedule. This means if employees leave the company after a period of time, they would not be able to take the entire profit share with them. It would be retained by the plan and distributed to participants. That mechanism can encourage valuable employees to stay and if they do leave the funds can benefit business owners, family, and other loyal employees.

Many NEFI members we speak with have plans that were set up many years ago. With the passing of the SECURE Act, everyone is going to need to re-evaluate and make sure their plan is compliant. It is a good opportunity to make sure the plan design, your company is offering makes sense for you the business owner, your family and the company.

If you would like to know more about various plan design options, please do not hesitate to reach out.

– Taylor Nissi


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