Profit Sharing Plans That Favors Owners & VIP Employees

• based on owner status
• based on officer, executive, or higher compensation status

How It Works

1. groups to be determined by title, salary, service, or position (or even a combination of these categories),
2. the owners and officers or key executives to receive a larger allocation (as a percentage of pay) than other Plan participants, and
3. the owner and officers or key executives to receive a maximum allocation of up to the maximum benefit limit allowed under Section 415 of the Internal Revenue Code.

• Who is the plan intended to benefit?
• Will the owner, officers, or key executives be receiving maximums?
• How many total classes?
• How many employees per class?
• What is the typical employee turnover rate?
• Is the company growing with new hires?
• What is the likely affordability by the employer to make deposits?

The following are common types of Profit Sharing plans:

1. Traditional Profit Sharing
2. Integrated Profit Sharing (integrated with Social Security)
3. Age-weighted Profit Sharing
4. New Comparability Profit Sharing
5. Profit Sharing that Includes a 401k Arrangement. A “SuperComp plan” combines New Comparability with a Safe Harbor 401k plan design.

Combining Safe Harbor 401k With New Comparability Profit Sharing

The (2) Components Of SuperComp

1. Safe Harbor 401k component – this aspect, a Safe Harbor 401k, permits employees to make annual pre-tax salary deferrals (i.e., up to $16,500 in 2011). Participants age 50 and older can contribute an additional “catch-up” amount of $5,500 (in 2011).
2. An employer must satisfy the Safe Harbor requirement by making an annual contribution based on one of these the following methods:
   1. matching - the basic Safe Harbor matching contribution is defined as a 100% match on the first 3% of compensation deferred plus 50% match on the next 2% of compensation. For example, an employee who saves 5% of pay would receive an employer match of 4%.
   2. enhanced matching – An alternative to using the above matching requirement is to use an “enhanced” matching formula.” This design requires that Non-Highly Compensated Employees receive a matching contribution at a rate that, at any rate of elective deferrals, provides an aggregate amount of matching contributions at least equal to the total amount of matching that would have been received under the basic matching formula. Also, the rate of matching contributions must not increase as the rate of an employee’s elective deferrals increase. The ADP and ACP nondiscrimination tests are deemed satisfied if either the basic or enhanced matching formulas are adopted.
   3. non-elective - as an alternative to matching, the employer may choose to make a deposit to all eligible employees in the amount of at least 3% of compensation, regardless of the employee deferral amount.
3. New Comparability Profit Sharing component – this element permits a target group of participants, such as owners and officers or key executives to receive their maximum allowable contribution under a defined contribution plan. Other groups of employees may receive lower contribution percentages.
Combined, these two components can create a great opportunity for participants to save large amounts of retirement capital in a short period of time. Small employers may welcome the ability to make maximum contributions for highly compensated employees under one SuperComp Plan.

Key Features Of A SuperComp Plan

• maximum salary deferrals for highly compensated employees
• maximum employer deposits to highly compensated employees
• discretionary Profit Sharing contributions

Considerations Of A SuperComp Plan

• Safe Harbor employer contribution required
• Safe Harbor employer contributions are 100% immediately vested
• discretionary Profit Sharing contributions are still subject to non-discrimination testing
• Safe Harbor contributions can not use last-day-of-plan-year rule
• typically, increased record keeping expense (vs. a 401k plan)
Automatic Savings And Safe Harbor 401k The Pension Protection Act represents an important new direction for 401k programs, encouraging employers to offer methods for improving the personal savings rate for employees and their families. One section of the Act defines an Automatic Enrollment arrangement for 401k and 403(b) plans, whereby an employee is automatically enrolled in a plan and deemed to have elected to defer a specified percentage of compensation into the plan. The Act provides that a 401k plan (or 403(b) plan) with an Automatic Enrollment arrangement that meets certain requirements (a “qualified Automatic Enrollment feature”) is treated as automatically satisfying the ADP and ACP nondiscrimination tests and is exempt from the top-heavy rules.

The basic requirements of Automatic Enrollment are as follows:

• Unless a newly eligible plan participant specifically opts out, automatic elective contributions are made at qualified automatic contribution rates. These arrangements must provide for deferral contributions to be made automatically at specified percentages of compensation, unless a participant specifically elects not to participate or elects a different deferral rate. The minimum required deferral amount increases following the first year of participation (automatic escalation), but may never exceed 10% of compensation. The minimum required automatic deferrals are as follows:

  Plan Year of ParticipationMinimum Deferral Percentage

  First Year3% of Compensation

  Second Year4% of Compensation

  Third Year5% of Compensation

  All Later Years6% of Compensation

• The employer must either (1) satisfy a matching contribution requirement or (2) make a non-elective contribution of at least 3% of compensation for each non-highly compensated employee eligible to participate in the automatic enrollment arrangement, and the participant must fully vest in the employer contributions after 2 years of service. If matching contributions are made, the plan is deemed to satisfy the ACP test if (1) matching contributions are not provided with respect to elective contributions in excess of 6% of compensation, (2) the rate of matching contributions does not increase as the rate of an employee’s elective contributions increases, and (3) the rate of matching contributions with respect to any rate of elective contributions of a highly compensated employee is not greater than the rate of matching contributions with respect to the same rate of elective contributions for a non-highly compensated employee.
• Participants must be given the opportunity to make an affirmative election to cease elective contributions at the “automatic” level or to have a different level of contributions made.
• Each participant subject to the automatic enrollment arrangement must receive a notice explaining his or her right to elect to cease automatic elective contributions or to have a different level of contributions and the manner in which the elective contributions will be invested absent the participant’s investment direction. The employee must be allowed a reasonable period of time after receipt of the notice and before the first automatic elective contribution is made to make such an affirmative election.
• Employers must select a “qualified default investment alternative” (QDIA) as defined in the IRS regulation. The intent of this investment is to best serve the retirement needs of employees who have not directed their own investments. A QDIA must either be managed by a registered investment company, plan Trustee, or by a Plan Sponsor who is a named fiduciary, and therefore it is usually a mutual fund. There are extensive guidelines for QDIAs, so it is important to review this information separately at the time that you are considering an Automatic Enrollment feature for your plan. Automatically enrolled participants must have the opportunity to change their default investment selection.
• Employer’s must, at least annually, notify all employees that the 401k continues to utilize an Automatic Enrollment feature, and that an employee may discontinue participation in the plan or select an alternate deferral percentage.
• If a participant who has been automatically enrolled discontinues their participation in the plan, any contributions to the plan on the participant’s behalf must remain in the plan until the participant’s employment is terminated, or the employee reaches age 65.

Automatic Enrollment has several AKAs including:

• Automatic Savings Plan
• Passive Enrollment
• Negative Election Enrollment
The Automtic Enrollment design offers great potential to employers who wish to improve the overall plan savings rate. Recognizing the significant current retirement savings shortfall among American workers, this solution has gained significant popularity among employers in recent years. Age-weighted Profit Sharing Plan Another plan design, Age-weighted Profit Sharing, is a creative concept for businesses interested in providing greater benefits for older participants who have fewer years to accumulate retirement capital than younger participants. Since the participant’s age or number of years to retirement is factored into the allocation formula, older participants receive a larger proportionate share of the contribution. An Age-weighted plan may be a standalone Profit Sharing plan or combined with a 401k component. When An Age-Weighted Profit Sharing Plan Is Best If owners and officers or key executives are older than other employees and you want them to receive a larger proportion of the employer’s contribution (than would be received under traditional Profit Sharing), an Age-weighted plan may be the best design. Although this type of plan is available to any size company, Age-weighted plans are designed to be top-heavy and are especially well-suited for small business and professional practices.

Key Features Of An Age-weighted Plan

• maximum employer deposits to older employees
• discretionary Profit Sharing contributions

Considerations Of An Age-weighted Plan

• If the age range of key executives and other non-key participants is similar, contribution rates may be similar for both groups; and
• younger owners and officers or key executives may not be adequately rewarded