Looking for tips designing 401(k) plan for typical small employer scen

[Guest SBlack]

Looking for suggestions:

Employer wants to start 401(k) plan (no safe harbor, no razzle dazzle)for the benefit of the employees (not just a tax deduction for ER!)

Approx 15 employees - will experience 50% growth over next year.

All but 3 EEs are HCEs.

ER only wants discretionary contributions (based on profitability).

ER wants to maximize deferrals for EEs. (Emphasis here)

Anyone have any ideas (other than standard)? Thanks!

[Guest PAUL DUGAN]

We have setup several plans of this type. The last was last month effective 1/1/01. The employer had 8 HCs (ave comp is 140000) an 2 NHCs at 30000 each. We proposed a straight 401(k) with a fail safe contrib if the ADP test failed. In the proposal we assumed that the NHCs would not contribute. The failsafe was a maximum 3300 or .28% of total payroll (the client thought this was a small price to pay to make his 8 most valuable EEs happy). At enrollment both NHCs elected 10% contributions. Therefore no ER contrib. is required and I'm a hero.

Try it you may be suprised what the NHCs will contribute.

[Guest]

it is unclear from your essage a critical consideration.

'15 ees, all but 3 are HCEs' hende 12 hces

if enough of these employees are owners or officers, then you could very well have a top heavy problem requiring 3% minimum. beware the slogan 'never a need for an ER contribution'

[Guest PAUL DUGAN]

Sorry I did not mention top heavy problems but the plans we have been working with have been high tech corporations where most HCEs are not Key EES. If a large majority of HCEs are key EEs the idea still makes sense since the failsafe contribution can also qualifies as top heavy minimums.

[rcline46]

Are you forgetting the top 20% rule? 20% of 15 is 3, therefore you only have 3 HCEs. SHould pass all testing without problems. DOne many this way.

[Richard Anderson]

Of course the 20% rule does not apply if the employee is a more than 5% owner.

[Guest SBlack]

Thanks for all of your responses. Here is some info to consider - this will be an affiliated service group, father owns 66% of Co. A & 24% of Co. B/ son owns 33% of Co. A & 24% of Co. B/ 2 other unrelated employees each own 8% of Co. B/ rest of Co. B is owned by non-employees, wife works for Co. A, but not an HCE. Unless he makes eligibility immediate, 3 EEs (2 HCEs)will not be eligible. My gut tells me that all of the new EEs that he expects to hire over the next year will not be HCEs. Will your plan still work Paul Dugan? Thank you -

[Richard Anderson]

"wife works for Co. A, but not an HCE." She is wife of who? If she is wife of 5% owner, she is HCE.

[Guest PAUL DUGAN]

You have changed the situation. But my idea is even better since you now only have one NHCE (wife of son or father is an HCE and one is ineligible). It should work next year with only 2 NHCEs assuming a 1 yr wait. After that its a guess and depends on the number of NHCs that become elig. and the contrib. rate of the NHCs. You have to compare the cost for the NHCEs against the tax savings for the HCEs.

One other idea we use in small family corps. is if the wifes comp is small do not have her contrib. Her zero contrib rate will allow other HCEs contrib more. This plan may have to many HCEs to make it work but is worth looking at the numbers.