Plan design options covering just the owner

[Guest R. Daestrom]

A company has a 401(k) plan in place that covers all eligible employees (ie, no excluded classes of ee's). The owner participates in the plan. Owner is now interested in knowing whether a separate plan can be designed in which he is the only one who is eligble/ benefits from it.

Are there any obvious solutions to this situation? Would there have to be other HCEs in the 401(k) plan in order for this to have a chance at working/combine both plans for testing purposes? Finally, would 401(a)(26) problems prevent a DB plan from even being considered as a solution?

Thanks for any comments.

[Blinky the 3-eyed Fish]

What is the goal of this owner by having a separate plan? To increase the plan contributions for him? How is the current profit sharing contribution being allocated and is he receiving max DC dollars in that plan?

[david rigby]

Floor offset?

[401 Chaos]

Agree we need more information here on what is trying to be accomplished but the owner might want to consider a simple nonqualified deferred compensation plan. While the rules on such plans may become more restrictive, a basic plan can be pretty quick and easy to put in place. The ease in both design and administration of a nonqualified plan may override some of the disadvantages as compared to qualified plans.

[Blinky the 3-eyed Fish]

The ease and administration of a nonqualified plan certainly is an advantage. The lack of a tax deduction though is a larger disadvantage, IMO. I fail to see how a nonqualified plan in a situation such as this with a single owner is beneficial. 401 Chaos, perhaps you could enlighten me as to why this is a desirable alternative.

[401 Chaos]

Blinky,

I'm not at all sure it is. As you note, the lack of a tax deduction is obviously a huge concern but, depending on the amounts and deferral periods involved, there could be situations where a nonqualified plan is worth considering when factoring in the time and expense involved in trying to get a more exotic qualified plan in place. I simply wanted to add the possibility to the mix for consideration, particularly if the situation would not allow for a qualified plan for some reason.

[Guest R. Daestrom]

Thanks to all for the responses. I talked to the owner today and got some information. Owner is only 31 years old and has intentions of selling the business within 15 years. There is another very highly paid individual covered in the existing 401(k) plan and the owner is adamant on not providing more benefits (ie, contributions) for this person. From what I gathered the plan is not top heavy. Owner likes the idea of being able to put $0 ER money into the plan and therefore was not open to cross-testing since you have to get past the gateway contribution amounts (not to say that his being 31 years old that cross-testing would work anyways). He also mentioned that he is maxing out his 401(k) and would like to contribute at least $1,000 more per month to another plan.

The goal was a little murky to extract from him, but I gathered that he has this idea of selling his existing business and using his accumulated retirement plan (combo qualified and possible NQ plans) to establish a bigger, better business. To that extent, he wants to accumulate as much as he can, as soon as he can. He has already talked to his acct and is thinking more about a NQ plan of some sort.

Given all of the above, I think a NQ plan is most likely best for him (although not for me, since I don't dabble with those).

[mbozek]

Could someone explain the advantage of a Non Q DC plan to the business owner. A Non Q DC plan is nothing more than an iou of the employer. Here the employee will defer part of his salary in return for the employer (who is the alter ego of the employee) paying the deferred amount in the future when the business is sold. The buyer may or may not agree to include the DC benefit in the purchase price. In any event the non Q Def.comp will be taxed as ordinary income when paid instead of being taxed as capital gains if it is included as the purchase price of the business.