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PLANS WE SUPPORT

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A 401(k) plan allows employees to contribute money from their own paychecks into an investment account dedicated towards their retirement. The company can also choose to match a percentage of the contributions an employee makes to their account. Standalone 401(k) plans are great for businesses looking to offer their employees a valuable retirement savings vehicle, as 401(k) accounts are the 3rd largest asset of most American households. However, they are subject to government nondiscrimination testing requirements that can make it difficult for highly paid individuals to maximize their contributions.

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A safe harbor 401(k) plan allows employers to make contributions that eliminate government nondiscrimination testing. This contribution can either be a matching contribution of up to 4% of an employee’s compensation, or a flat 3% of compensation contribution to every eligible employee, regardless of how much they contribute. Safe harbor 401(k) plans are great for business owners who want to allow themselves and highly paid employees to maximize their 401(k) contributions.

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Profit sharing plans allow employers to make discretionary contributions from the business to their employees. Profit sharing plans allow a great deal of flexibility and are almost always partnered with a 401(k) plan. Employers can decide to contribute anywhere between $0 up to 25% of compensation each year. “Cross-tested” profit sharing formulas are particularly effective at allowing businesses to contribute large amounts for stakeholders and other key employees.

 

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Cash balance plans allow business owners to make significantly larger contributions to key employees than a 401(k) profit sharing plan. A cash balance plan is a defined benefit plan that is designed to look like a defined contribution plan. The benefit amounts are determined by a formula written into the plan document. Each employee’s benefit is held in one pooled investment account.

When partnered with a 401(k) plan, cash balance plans can allow for over $300,000 in contributions for each business owner. They are powerful tools that require close partnership with an actuary to properly design and maintain.

 

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Traditional defined benefit plans also allow business owners to make significantly larger contributions to key employees than a 401(k) profit sharing plan. Employees are promised a fixed benefit starting at their retirement age, using a  formula typically based on years of service and compensation. While providing similar tax advantages as a cash balance plan, employees generally have a harder time understanding a traditional defined benefit plan.

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