Plan Types

Please call us to arrange a plan design consultation. We can walk you through the maze of retirement plan choices and design a plan that will fit both the owner and employees. Sometimes all you need is a simple amendment to your current plan document.

A 401(k) Plan is a retirement plan that allows participants to play an active role in saving for their own retirement by contributing a portion of their compensation into the plan on a pre-tax or after tax basis. Pre-tax deferrals reduce each participant’s current taxable income. The participant can defer taxation of the deferral contribution until they take a cash distribution.

Pre-Tax Deferral Example:

Annual Compensation  $30,000
Annual Deferrals           $5,000
Taxable Income             $25,000

Roth are taxed immediately based upon the participant’s current tax bracket. However, qualified distributions of Roth deferrals are not taxed on the investment earnings. The entire qualified cash distribution is tax free.

Deferral contributions are made through payroll deductions. The maximum amount an employee can defer into a 401(k) Plan either pre-tax or after tax during the 2022 calendar year is $20,500 or $27,000 if age 50 or older. This limit is adjusted each year to reflect changes in the cost-of-living. See our Annual Plan Limits page for the most recent deferral limit.

Safe Harbor 401(k) plans are like traditional 401(k) plans, but they offer advantages to companies at risk of failing the non-discrimination tests. Safe Harbor Plans are deemed to satisfy these tests, so business owners and other highly compensated employees may defer the maximum contribution regardless of low participation from non-highly compensated employees. The Safe Harbor provision ensures highly compensated participants will never need to receive deferral or match refunds due to a failed Deferral/Match test.

Plans can meet the Safe Harbor requirement with one of the safe harbor matching contributions or safe harbor non-elective contributions below:

  • (Basic) Match 100% of the first 3% of compensation, plus 50% of the next 2% of compensation
  • (Enhanced) Match 100% on the first 4% of compensation
  • (QACA) Match 100% on the first 1% of compensation, plus 50% on the next 5%. Must be combined with Automatic Enrollment feature
  • (Non-Elective) Contribute 3% of compensation to all eligible employees. This is not a match but is allocated to all eligible regardless of deferral participation

A 401(k) Profit Sharing Plan is a 401(k) plan as described above with an added provision that also allows Employer contributions to be made on behalf of the participants. An employer can contribute up to 25% of the total compensation of all eligible employees. The maximum amount that may be allocated to any one participant is the lesser of 100% of the participant's compensation or $61,000. Limit is $67,500 if age 50 or older (indexed – see annual plan limits). The employer decides on a year-by-year basis if and how much of a contribution will be made. It is not necessary to make a contribution each year. The Employer profit sharing contribution is a great way for an Employer to receive a Company deduction for the contribution, while also providing his or her staff with additional retirement savings.

A new comparability plan or cross tested plan is the most flexible qualified retirement plan available. This type of plan uses a sophisticated method of converting allocation rates to future benefit rates at retirement, thereby allocating larger contributions to older participants. This design is highly effective for Companies with older Shareholders/Owners and a younger non-highly compensated staff. The design allows participants to be grouped into classifications and receive a profit sharing contribution based on his or her classification. Each participant may receive a different percentage. This allows each Highly Compensated participant to determine his or her level of participation in the plan. This is especially useful for multiple partner or shareholder firms with different expectations of the annual contribution. It may also allow highly compensated participants to maximize ($67,500 each, indexed) while in some cases allocating only a 5% employer contribution to the staff. A new comparability plan may either be a standalone profit sharing plan or the profit sharing contribution component of a 401(k) plan.

A traditional defined benefit plan allows the Employer to make larger contributions thereby receiving much larger deductions than are allowed in a Defined Contribution plan (i.e. 401k profit sharing plan). A defined benefit plan can provide for a lifetime annual retirement income of up to the highest consecutive three-year average compensation or $210,000 (indexed), whichever is less. Unlike a defined contribution plan, the contributions are mandatory. The plan promises to pay participants a specified monthly income when they retire. The amount of monthly benefits is usually based on the participant's pay and years of service.

The funding for older employees is substantially larger than for younger employees. This can be advantageous to the Shareholders/Owners, who are often older than the other participants.

The annual funding can vary each year and is determined by an Enrolled Actuary. Each year the funding is based upon the eligible employee’ ages, compensation, years until retirement, the investment performance and liability of the plan.

A Cash Balance plan can be described as a hybrid between a Defined Contribution plan and a Defined Benefit Plan. It permits the larger level of contributions seen in a traditional Defined Benefit plan, yet it allows the flexibility of grouping participants into separate classifications each receiving different percentages as seen in a Defined Contribution plan. Similar to a traditional Defined Benefit Plan, the funding each year is mandatory and actuarially calculated. Unlike a traditional defined benefit plan, the account balance reported on the individual employee statement is stated as an easy to understand dollar amount instead of a monthly value at retirement. A cash balance plan is a great way to increase the Employer’s contributions yet maintain some flexibility over the allocation of the contributions.

This combination pairs two types of retirement plans together to receive maximum contributions and flexibility. Many Employers continue to maintain a 401k plan permitting the employees to participate in their own retirement, while also maintaining a cash balance plan to maximize the Employer contributions. It is possible to design a combination of a cash balance and 401k plan that will allocate the maximum $67,500 (indexed) in the 401k plan and an additional $50,000-$250,000 to the Owner(s) in the cash balance plan.

Employee Stock Ownership Plans (ESOPs) are designed to invest primarily in securities of the plan sponsor. The plan contributes shares of ownership to each eligible participant. It is thought that this type of plan increases the employee’s sense of concern for the financial health of the company and directly relates to the productivity of the employees. ESOPs also provide a market for the purchase of securities in closely held companies which can finance expansion of a company or provide a succession plan.

For more information on Carpenter Morse Group, contact us today!