401(k) safe harbor options
TRANSCRIPT
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Presented by T.J. Orr, ERPA, QPA, QKA
FREE PASS! 401(k) SAFE HARBOR OPTIONS
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2
The information contained in this presentation is
accurate as of March 2016
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Free Pass!3
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Goal: Win-Win for
Employers & Employees
Cost benefit analysis makes sense for employer to provide the promised contributions.
Employees get a guaranteed contribution from their employer, and can supplement with their own contributions.
4
401(k) Plan Design Goal:
A win-win for employers
and employees alike
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Agenda5
Challenges of Non-safe Harbor 401(k) Plans
ADP Testing
Top Heavy Minimum Contributions
Free Pass: Three Safe Harbor Options
Safe Harbor Non-elective
Safe Harbor Match
Auto-enrollment Safe Harbor
Beyond the Safe Harbor
Ideal Safe Harbor Candidates
Deadlines
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Challenges of Non-SH 401(k) Plans
ADP Testing Top Heavy Minimum
Contributions to
Non-Key Employees
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ADP Testing
Challenges of Non-SH 401(k) Plans7
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ADP Testing
The utilization of the 401(k) component of the plan is measured separately for the HCE group vs. the NHCE group.
NHCE utilization dictates the HCEs’ permissible utilization.
Testing impacted by:
The number of participating eligible participants, and
The rate of pay contributed
Pre-tax 401(k) and Roth 401(k) are treated the same.
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Testing Groups9
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The HCE Group10
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The NHCE Group11
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Example of a Failed ADP Test
Pay 401(k) Catch-UpNet of
Catch-UpDeferral % ADP
HCE A 44,000 24,000
Maximum(6,000)
Maximum18,000 40.91%
23.85%
HCE B 265,000 24,000
Maximum(6,000)
Maximum18,000 6.79%
Total
HCE47.7% ÷ 2
NHCE 1 18,000 -- -- -- 0%
2.5%
NHCE 2 37,000 1,480 -- 1,480 4%
NHCE 3 69,000 4,140 -- 4,140 6%
NHCE 4 30,000 -- -- -- 0%
Total
NHCE10% ÷ 4
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Example of a Failed ADP Test
ADP
NHCE ADP 2.5%
HCE ADP is Limited to Lesser of:
2+ (plus) the ADP of the NHCEs 4.5%
2x (times) the ADP of the NHCEs 5.0%
Maximum HCE ADP 4.5%
Actual HCE ADP 23.85%
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ADP Test Fails!
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Correcting the Failed ADP Test
Option 1: Making employer
QNEC contribution to NHCEs
Qualified Non-Elective
Contribution is 100% vested
immediately
Cannot be used in other non-
discrimination testing on non-
elective contributions (to be
discussed later in
presentation)
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401(k) Plan
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Correcting the Failed ADP Test
Option 2: Refunding / taxable distribution to HCE
Refund will be made to 1 or more HCEs who deferred the highest dollar amount
Must be refunded with earnings.
Taxable income to individual in year of distribution.
No penalty assessed to participant.
If distributed more than 2 ½ months (or 6-months if EACA) after plan year end, 10% penalty on employer, paid via Form 5330;
Failure must be corrected by the last day of the following plan year (unless corrected under EPCRS, which is more expensive).
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401(k) Plan$$$
$$$
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Top Heavy Minimum Contributions to
Non-Key Employees
Challenges of Non-SH 401(k) Plans16
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Key & Non-Key Employees
Key Employees:
Owners of more than 5%
Owners of more than 1% and compensation exceeding $150,000
Officers with compensation exceeding $170,000
Ownership attribution rules apply
Non-Key Employees:
Those who are not Key
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Example of a Top Heavy Plan
YEAR 1Key
EEPay 401(k) Total
% of Total Assets
HCE A Yes 44,000 24,000
48,000 89.5%HCE B Yes 265,000 24,000
NHCE 1 No 18,000 --
5,620 10.5%
NHCE 2 No 37,000 1,480
NHCE 3 No 69,000 4,140
NHCE 4 No 30,000 --
Total 53,620
More than 60%
of the plan’s
assets are held
by the Key EEs.
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Example of a Top Heavy Plan19
When a plan is top heavy, the non-key employees
(employed on the last day of the plan year) must receive an
employer contribution*, the rate of which is the lesser of:
The greatest allocation % to any key employee, including via their
elective deferral contributions, or
3%.
*The applicable contribution rate must be applied to the non-key EE’s
annual pay.
YEAR 1Key
EEPay 401(k) Deferral %
HCE A Yes 44,000 24,000 54.5%
HCE B Yes 265,000 24,000 9.1%
Here, non-key employees receive 3% of annual pay.
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Top Heavy Minimum
Contribution
YEAR 1 StatusKey
EEPay 401(k)
Top Heavy
Contribution
(3% to non-keys)
HCE A Active Yes 44,000 24,000 --
HCE B Active Yes 265,000 24,000 --
NHCE 1 Terminated No 18,000 -- --
NHCE 2 Active No 37,000 1,480 1,110
NHCE 3 Active No 69,000 4,140 2,070
NHCE 4 Active No 30,000 -- 900
Total 4,080
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401(k) Safe Harbor Options
Free Pass!21
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Safe Harbor
401(k) Plan
Free Pass!
Safe harbor 401(k) plans provide free passage
of ADP Testing and Top Heavy Minimum
Contribution Requirements!
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ADP/ACP
Safe Harbor
Match
ADP Safe
Harbor
Non-elective
Three Safe Harbor Options23
Auto-enroll
ADP/ACP
Safe Harbor
(QACA)
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ADP/ACP
Safe Harbor
Match
ADP Safe
Harbor
Non-elective
Safe Harbor Non-elective24
Auto-enroll
ADP/ACP
Safe Harbor
(QACA)
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Safe Harbor Non-Elective
No less than 3% of participation compensation
Not a matching contribution
Contribution generally must be provided to allNHCEs, regardless of their rate of deferral (including 0%).
Pairs well with additional non-elective contributions (aka profit sharing) for non-discrimination testing purposes.
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401(k) Plan
3%
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Safe Harbor Non-Elective
Pay 401(k) SH NE (3%) Total
HCE A 44,000 24,000
Maximum-- 24,000
HCE B 265,000 24,000
Maximum-- 24,000
HCE Total 48,000 -- 48,000
NHCE 1 18,000 -- 540 540
NHCE 2 37,000 2,200 1,110 3,310
NHCE 3 69,000 4,140 2,070 6,210
NHCE 4 30,000 -- 900 900
NHCE Total 6,340 4,620 10,960
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Safe Harbor Non-Elective
Pay 401(k) SH NE (3%) Total
HCE A 44,000 24,000
Maximum1,320* 25,320
HCE B 265,000 24,000
Maximum7,950* 31,950
HCE Total 48,000 9,270 57,270
NHCE 1 18,000 -- 540 540
NHCE 2 37,000 2,200 1,110 3,310
NHCE 3 69,000 4,140 2,070 6,210
NHCE 4 30,000 -- 900 900
NHCE Total 6,340 4,620 10,960
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*Optional
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Auto-enroll
ADP/ACP
Safe Harbor
(QACA)
ADP/ACP
Safe Harbor
Match
ADP Safe
Harbor
Non-elective
Safe Harbor Match28
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Safe Harbor Match
Basic Match
100% match on first 3% deferred, plus 50% match on next 2%, or
Enhanced Match
Commonly set at 100% match on first 4% deferred (must be at least as great as basic match at each rate of deferral)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
6% Deferral 5% Deferral 4% Deferral
Basic vs. Enhanced Safe Harbor Match
Deferral
Basic
Enhanced
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Safe Harbor Match
Pay 401(k) Deferral %Enhanced SH
Match (4%)Total
HCE A 44,000 24,000
Maximum54.54% 1,760 25,760
HCE B 265,000 24,000
Maximum9.06% 10,600 34,600
HCE Total 48,000 12,360 60,360
NHCE 1 18,000 -- 0% -- --
NHCE 2 37,000 1,480 4% 1,480 2,960
NHCE 3 69,000 4,140 6% 2,760 6,900
NHCE 4 30,000 -- 0% -- --
NHCE Total 5,620 4,240 9,860
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Allocation Periods31
Individual Pay Period
AllocationPlan Year Allocation
Deferrals and Pay
ConsideredFor the pay period only For the entire plan year
Matching deposits dueLast day of the following
quarter
Last day of the following plan
year
Employer & employee
benefit from routine
cash flow
Yes
Deposits still permissible each
pay period, and may be based
on individual pay period
allocation with true up at year
end, or based on year-to-date
data
Can TPA accurately
confirm computations/
deposits?
Less likely to do so More likely to do so
If participant delays
contribution
May miss out on matching
contributions
Retain ability to maximize
matching contributions
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Allocation Period Example32
Month
$100,000
Salary Deferral
Deferral
%
Deferrals Subject
to Match (4% of
Monthly Salary) Match
Jan 8,333.33 1,500.00 18.0% 333.33 333.33
Feb 8,333.33 1,500.00 18.0% 333.33 333.33
Mar 8,333.33 1,500.00 18.0% 333.33 333.33
Apr 8,333.33 1,500.00 18.0% 333.33 333.33
May 8,333.33 1,500.00 18.0% 333.33 333.33
Jun 8,333.33 1,500.00 18.0% 333.33 333.33
Jul 8,333.33 1,500.00 18.0% 333.33 333.33
Aug 8,333.33 1,500.00 18.0% 333.33 333.33
Sep 8,333.33 1,500.00 18.0% 333.33 333.33
Oct 8,333.33 1,500.00 18.0% 333.33 333.33
Nov 8,333.33 1,500.00 18.0% 333.33 333.33
Dec 8,333.33 1,500.00 18.0% 333.33 333.33
100,000.00 18,000.00 4,000.00 4,000.00
Individual
Pay
Period
Allocation
Plan Year
Allocation
Total
Deferrals
Deferrals Subject to Match
(i.e. 4% of Annual Pay) Match
18,000.00 4,000.00 4,000.00
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Allocation Period Example33
Month
$100,000
Salary Deferral
Deferral
%
Deferrals Subject
to Match (4% of
Monthly Salary) Match
Jan 8,333.33 - 0.0% - -
Feb 8,333.33 - 0.0% - -
Mar 8,333.33 - 0.0% - -
Apr 8,333.33 - 0.0% - -
May 8,333.33 - 0.0% - -
Jun 8,333.33 - 0.0% - -
Jul 8,333.33 3,000.00 36.0% 333.33 333.33
Aug 8,333.33 3,000.00 36.0% 333.33 333.33
Sep 8,333.33 3,000.00 36.0% 333.33 333.33
Oct 8,333.33 3,000.00 36.0% 333.33 333.33
Nov 8,333.33 3,000.00 36.0% 333.33 333.33
Dec 8,333.33 3,000.00 36.0% 333.33 333.33
100,000.00 18,000.00 2,000.00 2,000.00
Individual
Pay
Period
Allocation
Plan Year
Allocation
Total
Deferrals
Deferrals Subject to Match
(i.e. 4% of Annual Pay) Match
18,000.00 4,000.00 4,000.00
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Auto-enroll
ADP/ACP
Safe Harbor
(QACA)
ADP/ACP
Safe Harbor
Match
Auto-enrollment Safe Harbor34
ADP Safe
Harbor
Non-elective
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Auto-enrollment
Safe Harbor35
6%
100% match on first 1%
50% match on next 5%
0%
1%
2%
3%
4%
5%
6%
7%
Sample Employee Deferral Auto-enroll Safe Harbor
Safe Harbor Match for Plans With Auto-enrollment
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Auto-enrollment
Safe Harbor
For this Qualified Automatic Contribution
Arrangement (QACA):
Minimum and maximum rates of auto deferral and
auto escalation apply to plan years as follows:
1-2 – not less than 3%
3 – not less than 4%
4 – not less than 5%
5 – not less than 6% and no more than 10%
6 and thereafter – same
May wish to start at 6% without escalation for ease of
administration
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Auto-enrollment
Safe Harbor
For this Qualified Automatic Contribution
Arrangement (QACA):
100% vesting after 2 Years of Service rather
than immediate for non-QACA safe harbors
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Add Auto-enrollment
Safe Harbor
Pay 401(k)Deferral
%
Auto-enroll SH Match
Total
HCE A 44,000 24,000
Maximum54.5% 1,540 25,540
HCE B 265,000 24,000
Maximum9.1% 9,275 33,275
HCE Total 48,000 10,815 58,815
NHCE 1 18,000 -- 0% -- --
NHCE 2 37,000 1,480 4% 925 2,405
NHCE 3 69,000 4,140 6% 2,415 6,555
NHCE 4 30,000 -- 0% -- --
NHCE Total 5,620 3,340 8,960
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Additional Safe Harbor
Requirements
Notice: Participants must be notified within a reasonable period of time prior to the plan year beginning. This drives the year-end deadline to amend for next year’s provisions. 30-days notification deemed to be reasonable.
Documentation: Plan document must specify safe harbor formula
Vesting: Contribution 100% vested immediately (other than auto-enrollment safe harbor, which vests over 2 years)
Recipients of Contribution: Generally, all NHCEs must receive contribution Cannot condition contribution on anything, such as
employment on last day nor minimum hours worked
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Summary –
Case Study40
Contributions
HCEs 57,270
NHCEs 4,620 92.5%
7.5%HCEs
NHCEs
Contributions
HCEs 60,360
NHCEs 4,240 93.4%
6.6%HCEs
NHCEs
Contributions
HCEs 58,815
NHCEs 3,340 94.6%
5.4%HCEs
NHCEs
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Summary –
Vesting & Minimum Contributions
At least 3% contribution to all
NHCEs
41
Basic - 100% match on first 3%
plus 50% match on next 2%, or
Enhanced - Commonly 100%
match on first 4%; not less than
basic; ACP if more than 6%
100% match on first 1% plus
50% match on next 5%
100%
Immediate
Vesting
100%
Immediate
Vesting
YOS<2 = 0%
YOS≥2 = 100%
YOS = Years of Service = generally 1,000 Hours of Svc in Plan Year
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Summary –
Auto-Enrollment42
Is Auto-Enrollment
Required?
Optional
Optional
Yes. Mandatory.
Roth?
Optional
Optional
Optional
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Additional Non-elective Contributions
Other Methods to Increase
Owner Allocations43
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Additional Non-Elective
Contributions
On top of these safe harbor options, the
employer has the option to add a non-
elective contribution (aka “profit sharing”)
Subject to non-discrimination testing, unless
uniform allocation
ADP test is still satisfied by safe harbor
contribution
Top Heavy testing is no longer bypassed
A vesting schedule can apply
Contribution is discretionary
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Additional Non-Elective
Contribution
Pay 401(k) SH NE (3%)
HCE A 44,000 24,000
Maximum--
HCE B 265,000 24,000
Maximum--
HCE Total 48,000
NHCE 1 18,000 -- 540
NHCE 2 37,000 2,200 1,110
NHCE 3 69,000 4,140 2,070
NHCE 4 30,000 -- 900
NHCE Total 6,340 4,620
45
Pay 401(k) SH NE (3%)NE (aka
PS at 9%)Total
HCE A 44,000 24,000
Maximum-- 3,960 27,960
HCE B 265,000 24,000
Maximum-- 23,850 47,850
HCE Total 48,000 27,810 75,810
NHCE 1 18,000 -- 540 -- 540
NHCE 2 37,000 2,200 1,110 -- 3,310
NHCE 3 69,000 4,140 2,070 -- 6,210
NHCE 4 30,000 -- 900 -- 900
NHCE Total 6,340 4,620 10,960The non-elective contributions as a whole are not uniform, so non-discrimination testing is required.
Illustration results may vary based on demographics, including age.
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Getting HCEs to $59,000 via
Non-Elective Contributions
Pay 401(k)SH NE (3%)
HCE A 44,000 24,000
Maximum--
HCE B 265,000 24,000
Maximum--
HCE Total 48,000
NHCE 1 18,000 -- 540
NHCE 2 37,000 2,200 1,110
NHCE 3 69,000 4,140 2,070
NHCE 4 30,000 -- 900
NHCE Total 6,340 4,620
Illustration results may vary based on demographics, including age.
46
Pay 401(k)SH NE (3%) NE (2% for
NHCEs)Total
HCE A 44,000 24,000
Maximum--
26,000
Maximum50,000
HCE B 265,000 24,000
Maximum--
35,000
Maximum59,000
HCE Total 48,000 61,000 109,000
NHCE 1 18,000 -- 540 360 900
NHCE 2 37,000 2,200 1,110 740 4,050
NHCE 3 69,000 4,140 2,070 1,380 7,590
NHCE 4 30,000 -- 900 600 1,500
NHCE Total 6,340 4,620 3,080 14,040
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Three Years Later47
401(k)SH NE
(3%)NE (2% for
NHCEs)Total 3 Years Later
HCE
Total 48,000 -- 61,000 109,000
$369,120*
NHCE Total 6,340 4,620 3,080 14,040
Grand
Total 54,340 4,620 64,080 123,040
* Total flow of dollars contributed to the plan over
three years, unadjusted for investment performance
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Discretionary Matching Contributions
Other Methods to Increase
Owner Allocations48
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Discretionary Match
Matching contributions are typically subject to Average Contribution % Test (ACP Test) Similar to ADP testing
Contribution Percentage = Match ÷ Pay
Failed testing results in distribution of vested portion of match and forfeiture of non-vested match.
Less likely to fail when formula provides for caps on % of deferrals subject to match.
May be subject to vesting schedule
May be declared and funded after close of plan year.
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Discretionary Match
When combined with SHM or SHNE, receives automatic passage of ACP testing, and bypass of top heavy minimums, provided:
Salary deferral contributions in excess 6% of pay are disregarded;
Match does not exceed 4% of pay;
Rate of match does not increase as rate of deferral increases; and
There is not a requirement for employment on last day nor minimum hours worked.
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Add Discretionary Match to
Safe Harbor Match51
Pay 401(k)Deferral
%Enhanced SH Match
HCE A 44,000 24,000
Maximum54.54% 1,760
HCE B 265,000 24,000
Maximum9.06% 10,600
HCE
Total 48,000 12,360
NHCE 1 18,000 -- 0% --
NHCE 2 37,000 1,480 4% 1,480
NHCE 3 69,000 4,140 6% 2,760
NHCE 4 30,000 -- 0% --
NHCE
Total 5,620 4,240
Pay 401(k)Deferral
%Enhanced SH Match
Disc.
Match (4%)Total
HCE A 44,000 24,000
Maximum54.54% 1,760 1,760 27,520
HCE B 265,000 24,000
Maximum9.06% 10,600 10,600 45,200
HCE
Total 48,000 12,360 12,360 72,720
NHCE 1 18,000 -- 0% -- -- --
NHCE 2 37,000 1,480 4% 1,480 1,480 4,440
NHCE 3 69,000 4,140 6% 2,760 2,760 9,660
NHCE 4 30,000 -- 0% -- -- --
NHCE
Total 5,620 4,240 4,240 14,100
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Yet Another Matching Contribution
Other Methods to Increase
Owner Allocations52
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Yet Another Matching
Contribution53
SH Match + Discretionary Match + Fixed Match
Pay $265,000
401(k)24,000
Maximum
SH Match $10,600 100% vested immediately
Disc. Match $10,600
Deferrals in excess 6% of pay disregarded;
Match cannot exceed 4% of pay; Vesting
schedule applies.
Fixed Match $13,800
Cannot match deferrals in excess of 6% of
pay, but 4% cap does not apply. The rate of
the fixed match is adjusted for the limitations
applicable to the plan year. Vesting schedule
applies.
Total$59,000
MaximumThe 2016 annual additions limit is $59,000.
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Pay 401(k)Deferral
%Enhanced
SH Match
Disc.
Match
(4%)
HCE A 44,000 24,000
Maximum54.54% 1,760 1,760
HCE B 265,000 24,000
Maximum9.06% 10,600 10,600
HCE
Total 48,000 12,360 12,360
NHCE 1 18,000 -- 0% -- --
NHCE 2 37,000 1,480 4% 1,480 1,480
NHCE 3 69,000 4,140 6% 2,760 2,760
NHCE 4 30,000 -- 0% -- --
NHCE
Total 5,620 4,240 4,240
Add Discretionary Match to
Safe Harbor Match54
Pay 401(k)Deferral
%Enhanced
SH Match
Disc.
Match
(4%)
Fixed
Match
(86.67% of
First 6%)
Total
HCE A 44,000 24,000
Maximum54.54% 1,760 1,760 2,290 29,810
HCE B 265,000 24,000
Maximum9.06% 10,600 10,600 13,800 59,000
HCE
Total 48,000 12,360 12,360 16,090 88,810
NHCE 1 18,000 -- 0% -- -- -- --
NHCE 2 37,000 1,480 4% 1,480 1,480 1,285 5,725
NHCE 3 69,000 4,140 6% 2,760 2,760 3,590 13,250
NHCE 4 30,000 -- 0% -- -- -- --
NHCE
Total 5,620 4,240 4,240 4,875 18,975
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Ideal Candidates for a Safe Harbor
401(k) Plan55
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Ideal Safe Harbor
Candidates
Owners interested in maximizing contributions
They’re simply fully vesting a portion of what they
were going to contribute anyway
Top heavy 401(k) Plans
Budget conscious employers seeking
predictable contributions
Employers dedicated to providing generous,
guaranteed contributions to employees
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1 2 3 4 5 6 7 8 9 10 11 12
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Safe Harbor Deadlines
Startup
401(k) Plans
Month
Profit
Sharing Only
Plans Adding
a 401(k)
Prospective
plan amendments
for existing 401(k)
plans
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Collaboration58
We strongly value collaboration, which means…
We Are a Part of
Your Team
We Are Committed to
Your Continued Success
We Listen and Offer
Customized Solutions
We Respond Quickly
to Your Needs
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About Pinnacle Plan Design
Retirement Plan Design and Administration At Pinnacle Plan Design, we collaborate with employers and their advisors to design and administer retirement plans that turn tax dollars into retirement benefits.
Qualified retirement plans, such as 401(k) plans and defined benefit plans offer business owners and executives the ability to reduce current tax liabilities, help ensure their personal retirement plans stay aligned with firm goals, and provide a benefit to recruit and retain the talent needed to grow their business.
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Retirement Plan Design▲Administration▲Consulting▲Actuarial Services
www.pinnacle-plan.com
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Robbie Petrillo, QKAPlan Opportunity [email protected]
(520) 618-1305