A traditional 401(k) Plan allows an employee to save for retirement through a 401(k) salary reduction plan, have the savings invested, and defer current income taxes on the saved money and earnings until withdrawal. A Profit Sharing Plan is an employer funded, discretionary plan that can provide benefits to owners and their employees based on the company’s profitability. These two plans coupled together, called the “401(k) Profit Sharing Plan”, can be a nice tool to flexibly save for owners’
retirement through the 401(k) portion of the plan and to recruit and retain good employees.
The 2010 annual contribution limits for the 401(k) are $16,500 with a $5,500 catch-up contribution if you are age 50 before year-end. This allows for $22,000 total contribution with a catch-up contribution. The Profit Sharing Plan also allows for the employer to make annual contributions that are the lesser of 25% of an employees compensation or $49,000. As you can see, retirement savings can be significant with this plan while maintaining the maximum flexibility for the employer during these difficult economic times.
The employer’s contributions to the Profit Sharing Plan are strictly discretionary. One benefit of Profit Sharing Plans is that the employer can utilize different vesting schedules and forfeitures for the plan to encourage employees to stay with the employer.
Under this type of retirement plan, the administrative costs may be higher due to the annual requirement of the 5500 Form and the necessity to perform testing to maintain that the plan does not discriminate in favor of the highly compensated employees.
An employee may withdraw from their retirement account free from penalty once they have reached age 59 ½. Any withdrawal that is permitted before the age of 59 ½ is subject to a 10% penalty and normal taxation as ordinary income. Certain hardship
provisions can be built into the plan document to allow for these withdrawals. Loans are another provision that can be put into a plan to allow for an employee to access their money prior to retirement of age 59 ½.
Call us to discuss how you could use a 401(k) / Retirement Plan for your business in 2010. They must be started on or before December 31, 2010 for the 2010 calendar year.
Mark Vitek, CPA/PFS, CFP®
…until next week.