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401(k) and Profit Sharing Plans

The two most popular types of Defined Contribution Plans are 401(k) and profit sharing plans. In a 401(k) plan, employees elect to contribute amounts from their paychecks on either a traditional pre-tax basis or on a Roth after-tax basis. The employer sponsoring a 401(k) plan often makes a matching contribution to provide employees incentive to save for retirement. When setting up a 401(k) plan, we discuss with you what your goals are for the plan, what plan design options will best meet those goals and which recordkeeping platform will work best based on your needs and plan design.

Many companies offer either a profit sharing plan or include profit sharing as a component of their 401(k) plan. There are several profit sharing allocation formulas that should be considered when designing your plan. One of the most popular options is a cross tested profit sharing plan. Under cross testing, you allocate different contribution rates to your employees based on criteria you select. For example, you may want larger contributions to go to the owners of the business or certain top performers or you may want consider other criteria such as tenure with the company or  job classifications. Under the cross tested method, we project the value of current year contributions into a benefit at retirement age. As such, cross testing takes into account the time value of money when determining value of benefits.  This often results in the employer being able to make larger contributions to selected employees.

If you already sponsor a profit sharing or 401(k) plan, consider the following:

  • Are you able to save as much as you would like for retirement?
  • Does your plan have problems passing nondiscrimination testing?
  • Are the fees associated with your plan reasonable?
  • Are you getting the level of service you desire from your current TPA?

If you current plan design is not meeting your goals, contact us to discuss your options. We offer creative plan designs and timely and attentive service.

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