Broker Check

Safe Harbor 401(k)

with Age Weighted Profit Sharing Plan Illustration

The Safe Harbor 401(k) is a salary deferral retirement plan that uses an employer contribution to pass the discrimination test contained in the Internal Revenue Code.  The employer makes a non-elective contribution or a specified matching contribution, which is 100% vested.  This plan is best suited for businesses that have low employee participation and would otherwise have trouble passing discrimination testing.   Two options for employer contributions are available:

A 3 % non-elective contribution based upon wages, or A dollar for dollar match of Employee contributions up to 3% with 50 cent on the dollar match between 3% and 5% Maximum Employer contribution is therefore 4% of wages.

An Age-weighted Profit Sharing Plan is one that allows for higher contributions for older employees who are closer to retirement age. This plan is structured to benefit the older participant.   This plan works best when there are a large number of younger employees and only a few older employees.    Each participant is allocated a share of employer contributions and forfeitures based upon the amount needed to provide a benefit at retirement age of one percent of pay.   Note that if an Age-weighted plan is not preferential because of older non-key employees, an alternative testing can be established that distinguishes between classes of employees, such as officers versus non-officers, in order to meet the non-discrimination testing requirements contained in the Internal Revenue Code.

3% Safe Harbor 401(k) with Aged-based Profit Sharing Plan Illustration for 2006


Hypothetical
Employee
AgeEmployee Annual
Compensation
Employee
Elective

401(k)
Contribution
Employer
Non-Elective
3% Safe Harbor
Contribution
Employer
Elective
Profit Sharing
Contribution
Employer
Profit Sharing
Contribtion
By Percent
Total Annual
Contribution
To Retirement
Plans
Key Employee/
Owner Age
50 & Up

56

$220,000

$20,000

$6,600

$22,400

13.18 %  

$49,000

Employee 1

39

76,400

0

2,293

224

 3.29 %

2,517

Employee 2

26

46,100

0

1,381

0

 3.00 %

1,381

Employee 3

40

44,100

0

1,324

16

 3.04 %

1,340

Sub-Total
Non-Key
Employees

$166,600

$0

$5,998

$240

 

$5,238

Total

$386,600

$20,000

$11,598

$22,640

 

$54,238


               Executive Summary              

  
Employer Safe Harbor and
Profit Sharing Contributions  

Percent to Owner:                    84.70 %

 Total Allocation to Owner:         $49,000
 (including owner’s elective employee contribution)

------------------------

Allocation to Non-owners:            $6,238

 Percent to Non-owners:                 15.30 %




  • The above is for illustration purposes only. Your company’s allocation will be different.
  • Changes to the data will directly impact the results. Actual results will vary depending upon data input.
  • No assumptions based upon this illustration should be made with respect to any on-going business.
  • Illustration does not include elective 401(k) contributions by non-key employees. Because this illustration includes a non-elective 3% employer safe harbor contribution, the amount of elective 401(k) contributions by non-key employees will not effect Employer`s overall obligations to the Plan.
  • A portion of the age-weighted contribution is satisfied by the 100% vested 3% non-elective employer contribution.
  • The non-elective contribution is subject to different vesting and distribution rules.
  • The above figures may be rounded for illustrative purposes.

Ask Mr. Davies for a proposal and illustration for your business
before making any decisions or taking any action.