Retirement Plan Suggestions by Profession:
Law firm or Physician’s office:
Utilize a defined benefit plan and a safe harbor 401(k) plan. The defined benefit plan should exclude all highly compensated/non-shareholders from the plan. This will greatly reduce the overall contributions required by the plan. Shareholders would receive a contribution as would the non-highly compensated employees but to a lesser extent. The only drawback would be if you have older employees that fall in the non-highly compensated group –they would receive a higher contribution due to their age (see Contribution Limit for Retirement Plans and IRA’s)
They could also provide a safe harbor 401(k) plan. This would limit the contribution for employees deferring to a 3% non-elective match. Allowing for the match contribution would make the highly compensated able to defer the maximum contribution for that year.
A 6% profit sharing contribution can also be made –but the highly and the non-highly would both get the same percentage. It is voluntary decision that can be made each and every year.
Utilize a cross-tested profit sharing/safe harbor 401(k) plan. This type of plan assumes that the highly compensated employees also comprise a group with higher ages. A typical contribution would be 20% for the highly compensated group and 5% for the non-highly compensated group. The actual percentage of contributions is determined based on the census request (employee information). The non-highly compensated group receives a lower contribution amount.
This can also be paired with a safe harbor 401(k) plan –again allowing for a 3% non-elective match. Safe harbor (the 3% match) is what allows the highly compensated to defer the full amount allowed for that year. In order for the highly compensated to defer the maximum amount, the 3% is granted to everyone that is active (not terminated) in the plan.
The best plan for this type of firm would be a safe harbor 401(k) plan with either the 3% safe harbor non-elective contribution or utilizing the 4% match (matching 100% of the first 3% and 50% of the next 2%). The 4% matching can sometimes be less of a burden because the percentages contributed is lower with manufacturing/hourly employees.
The purpose for doing any match is for the highly compensated to be able to defer the maximum amount. Without safe harbor, the plan has to test the contributions and the highly compensated can only do 2% more than the non-highly compensated employees.
CPA/ Accounting office
The best plan for this type of firm would be an age-weighted profit sharing plan with a safe harbor 401(k) plan. The age-weighted profit sharing plan assumes that the partners or owners of the firm are older than the other employees. If this is not the case, then you would want to use a new comparability (cross-tested) plan. If you do the age-weighted profit sharing it allows the older employees a higher percentage of the contribution – something like 10% for the partners and 3% for the remainder of the employees.
A safe harbor 401(k) plan should also be used utilizing either the 3% non-elective contribution or the 4% matching contribution (100% for the first 3% and 50% for the next 2% –matching on a 5% contribution).
The best plan for this type of company is a traditional 401(k) plan. This plan will test the non-highly compensated group and allow the highly group to contribute 2% more than the non-highly group. The percentages that are deferred in a retail store are usually low because of the hourly wages. This type of plan can also allow for a profit sharing contribution, but that would be given equally to all eligible employees (as a percentage of salary).