Profit Sharing Plan with NO deferral Option

[Guest willow]

Good Morning:

Does anyone have or know of any kind of "White Paper" or other research that shows the benefits of adding a deferral feature to a Profit Sharing plan.

We have a prospect, an old line manufacturer, who has had a PS plan, but never added a deferral feature. When our sales people met with the

prospect, the prospect said they were afraid that adding deferrals would cause them to be a "top hat" plan (I assume they meant top heavy). I don't have any

census information, but assume they have the "normal" percentages of HCE's and NHCE's. I also do not know if they have any Non-Qualified plans or

not.

According to the sales people, the HR person wants to add the feature, but needs something in writing that states the benefits of adding the deferral feature,

but also points out any items to watch out for when adding this feature. Something from a respected, independent source like a trade group journal

or law firm, etc.

I need to get this white paper to the client before I can get out to talk to them.

Your help is greatly appreciated.

Regards,

Willow

[david rigby]

Probably this originates from the unhappy circumstance of a deferral only plan that becomes top-heavy.

In 25+ years in this business, I have seen only one top-heavy plan which had more than 75 participants. The larger the plan, the less likely TH is. How does this plan fit with that comparison? (OK, it is not proof of anything, just experience over many years. The TH issue may be irrelevant.)

[Guest willow]

Pax:

Thanks for your answer. The company has over 200 hundred lives, so I am

not to worried about Top-Heavy.

A point I failed to mention is that the PS last year was 15% of salary. The president and CEO do not want to add a deferral, but HR does. HR is our

main contact.

So again, the HR contact is looking for something written and independent of our firm. Maybe a large consulting firm, a law firm (Fred Reish?) etc.

My thoughts are that the President and CEO probably think that with a 15%

PS, not many people will go for the deferral (maybe they have a good point)

and that the extra administration of the deferral feature would not be worth the

time and effort (again maybe they have a good point).

Thanks!

[david rigby]

Perhaps someone wants to take advantage of the "catch-up" provisions.

If the PS contribution is expected to remain at the 15% level, then a plan with deferral will not be later amended to add a match, unless it is a safe-harbor (if they can afford 15% PS, then the safe harbor match will be part of that).

[Kirk Maldonado]

There are some law firms with well over 75 participants that are top-heavy.

That isn't too surprising because (1) many key employees will make more than the 401(a)(17) limit, (2) the key employees tend to stay there forever, (3) many key employees are savvy investors, and (4) there can be a lot of turnover among support staff and junior attorneys.

[Guest willow]

This is a very interesting discussion and I greatly appreciate the conversation, however, I still need to find something written and independent of our firm. Maybe a large consulting firm, a law firm (Fred Reish?) etc.

Does anyone have an old marketing piece explaining the pros and cons of adding a deferral feature to a PS plan?

Thanks!!!

Have a safe and happy Memorial Day!!

[R. Butler]

This is a very interesting discussion and I greatly appreciate the conversation, however, I still need to find something written and independent of our firm. Maybe a large consulting firm, a law firm (Fred Reish?) etc.

Does anyone have an old marketing piece explaining the pros and cons of adding a deferral feature to a PS plan?

Thanks!!!

Have a safe and happy Memorial Day!!

You should be able to do an internet search & find quite a bit on both the advantages & disadvantages of 401(k) plans.

[Alf]

With a 15% PS, not many people will go for the deferral and that the extra administration of the deferral feature would not be worth the time and effort, but that is just my opinion!

[MWeddell]

With a 15% PS, not many people will go for the deferral and that the extra administration of the deferral feature would not be worth the time and effort, but that is just my opinion!

With 200 eligible employees, it seems like the benefits would be worth the administrative hassle, but again it's just my opinion.

The most important con is that having a 401(k) with no match might increase the demand for a match. That strikes me as pretty much irrelevant where there's already a 15% profit-sharing contribution.

If one is concerned about administration hassle, the HCE limit could be set so that the plan automatically passes using the prior year testing method. At the least, this would let the age 50+ HCEs make catch-up contributions.

[GBurns]

From a sales perspective, If the President and CEO have a negative, How would giving the HR person anything help? Are you expecting to overcome this negative with an few articles which could even be perceived as being not quite on point, or are you expecting the HR person to be able to make the sales "pitch" for you?

IMHO, if you cannot get audience with the President and CEO to directly discuss the matter, explain and make your presentation, then this is not even a suspect, much less a prospect. It is unrealistic to expect the HR person to become a salesperson with a convincing presentation/explanation, just because they read a few articles and listened to you. It takes a salesperson quite some time to learn enough to be effective, it is unrealistic to expect the HR person to do so in a few minutes.

[AndyH]

Try this:

http://www.dol.gov/ebsa/publications/401kplans.html

[jaemmons]

Or this http://www.irs.gov/retirement/article/0,,id=120298,00.html

[Belgarath]

I tend to agree with Alf here. But whether the "benefits" to the employer outweigh the costs/liabilities is subjective at best.

Certainly there are many benefits to the employees. But how to quantify the benefit to the employer that is received through increased employee satisfaction/productivity/recruitment/retention is pretty tricky. If they have a stable workforce without tons of turnover, then it might tip the scales toward installing such a plan. Again, depending upon demographics and normal contribution patterns to the profit sharing plan, a safe harbor might possibly be appropriate with a corresponding reduction in the contribution otherwise made to the PS - this could do away with some testing issues and reduce administrative burden/costs, which might make the CEO happy.

You might try some of the big mutual fund or insurance companies. They probably would be more than happy to provide you with marketing materials in this area, at no charge.