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Safe Harbor 401(k) Discretionary Contributions/Profit Sharing


mitchelt

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I am going to soon be buying a small business and will offer a Safe Harbor 401(k) plan.

My question has to do with the 3 owners (2 + myself).

At the end of the year, let's say we are going to give ourselves a $50k bonus ea. (profit sharing), can we do this even though the rest of the 6 or so employees will not be receiving this bonus?

Employees will be getting a merit based bonus, if they "earned" it.

Thank you.

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If you are putting it into the Plan as a profit sharing contribution it would not pass IRS testing if only owners received an allocation.

It is possible to draft the plan to give different rates of contributions to different classifications of employees but it is likely that a "large" allocation to owners would very likely require at least a 5% of pay contribution to rank and file.

The interplay of the various Internal Revenue Code sections discrimination test are generally too complex to give you a simple yes or no answer.

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Lou...thank you for the information.

I was leaning towards what you said, that it would not fly if we did this.

I think I will just leave this one to the Plan Administrator/Management Firm we will eventually hire, let them figure it out and earn their fee! :D

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Make sure you have the conversation in November/December. At that point you still have two options: Cash bonus, or profit sharing. Aftter 12/31 it's too late to do a bonus to get your withholdign paid in, etc. As tax professionals always say, you can't do tax planning in January.

Based on how the question was phrased, I'm assuming you are taxed as a corporation (i.e., via w2 wages) and not as a partnership (via K-1).

Austin Powers, CPA, QPA, ERPA

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Thank you for the tip.

We will be an S-Corp, do you know if the Cash Bonus can be pre-tax and dumped directly into the 401(k) or would it just be taxed and then we can do whatever we want to do with it like put it in a Roth?

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