The intelligent 401k advisor recommends a variety of plans depending on the specific needs of the business.
A profit sharing plan is a plan that makes no promises of contributions or benefits. The business can decide each year if it will make a contribution on behalf of the plan participants. Profits are not a requirement to make the contribution. Once a contribution is made, the earnings on the funds will ultimately determine the benefit level at retirement. The maximum deduction to the business in any one-year is 25% of the total salaries of the plan participants plus the amount of salary deferrals made to the plan. The maximum allocation that can be made to any one participant for the year is 100% of salary to a maximum dollar limit of $45,000 (for the year 2007).
A traditional profit sharing plan will allocate the contribution to each participant in proportion to salaries paid. For example, if a participant’s salary is 10% of the sum of the salaries of all participants, that participant will receive 10% of the company’s plan contribution.
An age-weighted profit sharing plan will allocate the contribution according to age. Older employees will receive larger contributions as a percentage of salary. The allocation is determined by calculating the contributions required to fund the same projected hypothetical benefit at retirement for all participants. Then each participant’s percentage allocation determined in this manner is applied to the actual annual contribution of the company. The net result is larger allocations, as a percentage of salary, for older participants.
A new comparability profit sharing plan allows a large amount of flexibility in allocating the contribution among participants. Participants are separated into "reasonable" classes. Each class may receive different allocation percentages. Certain guidelines must be met to assure no discrimination among plan participants. This is the most flexible type of profit sharing plan and can be very appealing to many small business owners and their advisors.
A 401k plan is a profit sharing plan that allows employees to make pre-tax contributions to the plan in addition to any employer’s contribution. These 401k provisions allowing elective deferrals by the employees may be incorporated into any of the types of profit sharing plans described above. These deferrals are held in individual accounts and the earnings on the funds will determine the level of benefits at retirement. The maximum deferral allowed by an employee for the year 2007 is 100% of salary to a maximum dollar amount of $15,500. (If the employee is at least age 50 at any time during the plan year, he/she may defer an additional $5,000 "catch-up contribution".) The contribution allowed by highly compensated employees may be limited depending on the results of required comparison testing of levels of contributions by non-highly compensated employees.
A safe harbor 401k profit sharing plan will assure the maximum contributions made by highly compensated employees will not be limited by the contribution level of non-highly compensated employees. Certain employer contributions must be made on behalf of non-highly compensated for this to be accomplished.
Integrity Financial Corporation helps business owners and individuals build a financial legacy through well designed executive compensation and retirement plans. Our clients can expect to receive personalized service and expertise, built on a foundation of trust. Call us at 425-454-1254 for the Seattle or Bellevue area, or at 1-800-794-401k. Or visit our website at www.ifc401k.com
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