Advanced Safe Harbor 401(k) Plan Designs (for the Financial Advisor)

Copyright (C) 2012, 2013, 2014, 2015 Richard A. PerryCopyright (C) 2012, 2013, 2014, 2015 Richard A. Perry
Advanced SafeAdvanced Safe
Harbor 401(k) PlanHarbor 401(k) Plan
DesignDesign
((for the Financial Advisorfor the Financial Advisor))
Richard A. Perry, ChFC, QPA, QPFC, AIFARichard A. Perry, ChFC, QPA, QPFC, AIFA®®
Retirement Resource Group, LLCRetirement Resource Group, LLC
250 Hampton Street250 Hampton Street
Auburn, MA 01501Auburn, MA 01501

FOR FINANCIAL PROFESSIONAL USE ONLYFOR FINANCIAL PROFESSIONAL USE ONLY
- NOT FOR DISTRIBUTION TO THE PUBLIC- NOT FOR DISTRIBUTION TO THE PUBLIC
DisclaimerDisclaimer
 This presentation may cause: dizziness; drowsiness (includingThis presentation may cause: dizziness; drowsiness (including
daytime drowsiness); "drugged" feeling; dry mouth; headache;daytime drowsiness); "drugged" feeling; dry mouth; headache;
nausea; nose or throat irritation; sluggishness, stomach upset,nausea; nose or throat irritation; sluggishness, stomach upset,
or weakness. Seek medical attention right away if any of theseor weakness. Seek medical attention right away if any of these
SEVERE side effects occur: severe allergic reactions (rash;SEVERE side effects occur: severe allergic reactions (rash;
hives; itching; difficulty breathing; tightness in the chest;hives; itching; difficulty breathing; tightness in the chest;
swelling of the hands, legs, mouth, face, lips, eyes, throat, orswelling of the hands, legs, mouth, face, lips, eyes, throat, or
tongue; throat closing; unusual hoarseness); abnormaltongue; throat closing; unusual hoarseness); abnormal
thinking; behavior changes; chest pain; confusion; decreasedthinking; behavior changes; chest pain; confusion; decreased
coordination; difficulty swallowing or breathing; fainting; fastcoordination; difficulty swallowing or breathing; fainting; fast
or irregular heartbeat; hallucinations; memory problems (eg,or irregular heartbeat; hallucinations; memory problems (eg,
memory loss); mental or mood changes (eg, aggression,memory loss); mental or mood changes (eg, aggression,
agitation, anxiety); new or worsening depression; severeagitation, anxiety); new or worsening depression; severe
dizziness; shortness of breath; suicidal thoughts or actions;dizziness; shortness of breath; suicidal thoughts or actions;
vision changes;vision changes; or desire to become a TPAor desire to become a TPA..

ObjectivesObjectives
 Understand plan design to better advise:Understand plan design to better advise:
 ProspectsProspects
 ClientsClients
 Types of designs:Types of designs:
 Permitted Disparity (Social Security Integration)Permitted Disparity (Social Security Integration)
 Age-WeightedAge-Weighted
 Cross TestedCross Tested
 Triple Stacked MatchTriple Stacked Match
 Not to become a TPANot to become a TPA

Safe Harbor 401(k) PlansSafe Harbor 401(k) Plans
 Small Business Job Protection Act ofSmall Business Job Protection Act of
1996 (“SBJPA”)1996 (“SBJPA”)
 Effective post-1998 plan yearsEffective post-1998 plan years
 That is, plan years beginning on or afterThat is, plan years beginning on or after
January 1, 1999January 1, 1999
 Small PlansSmall Plans
 Large PlansLarge Plans
 McDonald’sMcDonald’s

401(K) Plan Issues401(K) Plan Issues
 Average Deferral Percentage TestAverage Deferral Percentage Test
(ADP)(ADP)
 IRC §401(k)IRC §401(k)
 Average Contribution Percentage TestAverage Contribution Percentage Test
(ACP)(ACP)
 IRC §401(m)IRC §401(m)
 Top HeavyTop Heavy
 IRC §416(g)(1)IRC §416(g)(1)
 EGTRRA (Top Heavy Exemption)EGTRRA (Top Heavy Exemption)

401(k) Plan Limits –401(k) Plan Limits –
IRC §402(g)(1)IRC §402(g)(1)
 $18,000 (2015)$18,000 (2015)
 Indexed for Cost of Living increasesIndexed for Cost of Living increases
 $6,000 Catch-Up provisions (2015)$6,000 Catch-Up provisions (2015)
 Age 50 or older at any time during the yearAge 50 or older at any time during the year

ADP & ACP TestADP & ACP Test
 Highly Compensated Employees (HCEs)Highly Compensated Employees (HCEs)
 OwnsOwns more thanmore than 5%5% of the voting shares ofof the voting shares of
the company stock (includes familythe company stock (includes family
attribution)attribution)
 Earnings in excess of $120,000 (2015)Earnings in excess of $120,000 (2015)
 Earnings indexed for Cost of Living increasesEarnings indexed for Cost of Living increases
 May be limited to top 20% of employees (byMay be limited to top 20% of employees (by
compensation)compensation)
 Look back yearLook back year

 Non Highly Compensated EmployeesNon Highly Compensated Employees
(NHCEs)(NHCEs)
 All other employeesAll other employees

 Basic TestBasic Test
 Average deferral for HCEs no more thanAverage deferral for HCEs no more than
1.25% of average deferral for NHCEs1.25% of average deferral for NHCEs
 Alternate TestAlternate Test
 Average deferral for HCEs no more thanAverage deferral for HCEs no more than
twice that of NHCEs (limited to 2% spread)twice that of NHCEs (limited to 2% spread)

NHCE AverageNHCE Average HCE MaximumHCE Maximum
1%1% 2%2%
2%2% 4%4%
3%3% 5%5%
4%4% 6%6%
5%5% 7%7%
6%6% 8%8%
7%7% 9%9%
8%8% 10%10%
9%9% 11.25%11.25%
10%10% 12.50%12.50%
Tests Identical
Alternate Test
Basic Test

Top Heavy PlansTop Heavy Plans
 More than 60% of the benefits accrue to KeyMore than 60% of the benefits accrue to Key
EmployeesEmployees
 OwnsOwns 5% or more5% or more of the stock of the business (includingof the stock of the business (including
family attribution rules)family attribution rules)
 1% owner earning in excess of $150,000 (not indexed)1% owner earning in excess of $150,000 (not indexed)
 Officer and earns in excess of $170,000 (indexed) (2015)Officer and earns in excess of $170,000 (indexed) (2015)
 Minimum required contribution for non-KeyMinimum required contribution for non-Key
Employees:Employees:
 3% of compensation, or3% of compensation, or
 If less, the amount given to the Key EmployeeIf less, the amount given to the Key Employee
with the highest allocation rate.with the highest allocation rate.

Top Heavy ExemptionTop Heavy Exemption
 Contributions consist solely of:Contributions consist solely of:
 Elective DeferralsElective Deferrals
 ADP Safe Harbor ContributionsADP Safe Harbor Contributions
 Matches that satisfy ACP safe harbor rulesMatches that satisfy ACP safe harbor rules
 Cannot consider deferrals in excess of 6% of safe harborCannot consider deferrals in excess of 6% of safe harbor
compensation.compensation.
 Rate of match cannot increase as deferrals increase.Rate of match cannot increase as deferrals increase.
 No HCE can have a rate of match in excess of the rate ofNo HCE can have a rate of match in excess of the rate of
match ofmatch of anyany NHCE.NHCE.
 Discretionary match amount cannot exceed 4% of SafeDiscretionary match amount cannot exceed 4% of Safe
Harbor Compensation.Harbor Compensation.

Safe Harbor 401(k) PlanSafe Harbor 401(k) Plan
 AdvantagesAdvantages
 No ADP or ACP TestingNo ADP or ACP Testing
 HCE deferral certaintyHCE deferral certainty
 No correctiveNo corrective
distributions or reportingdistributions or reporting
 Can be used to satisfyCan be used to satisfy
Top Heavy requirementsTop Heavy requirements
 DisadvantagesDisadvantages
 Obligates employer to aObligates employer to a
contributioncontribution

Top Heavy ExemptionTop Heavy Exemption
 Top Heavy Exemption does not applyTop Heavy Exemption does not apply
if:if:
 Forfeitures are allocated to accountsForfeitures are allocated to accounts
 Nonelective discretionary contributionsNonelective discretionary contributions
are allocatedare allocated
 Longer eligibility is required for the SafeLonger eligibility is required for the Safe
Harbor contribution that elective deferralsHarbor contribution that elective deferrals

 Non-elective contributionNon-elective contribution
 QNECQNEC
 Flexible Safe Harbor PlanFlexible Safe Harbor Plan
 Plan document states plan may be amendedPlan document states plan may be amended
during the year (at least 30 days prior to planduring the year (at least 30 days prior to plan
year end) to become safe harboryear end) to become safe harbor
 Supplemental notice requiredSupplemental notice required
 Eligible matching contributionEligible matching contribution

 Non-elective contribution equal to 3%Non-elective contribution equal to 3%
of compensationof compensation
 All employees eligible by age and serviceAll employees eligible by age and service
 Employee need not make elective deferralEmployee need not make elective deferral
contributioncontribution

 Matching contribution equal to at least:Matching contribution equal to at least:
 Basic Safe Harbor MatchBasic Safe Harbor Match
 100% of the first 3% of an employee’s elective100% of the first 3% of an employee’s elective
deferrals, plusdeferrals, plus
 50% of the next 2% of an employee’s elective50% of the next 2% of an employee’s elective
deferralsdeferrals
 Enhanced Safe Harbor MatchEnhanced Safe Harbor Match
 100% of the first 4% of an employee’s elective100% of the first 4% of an employee’s elective
deferralsdeferrals

 Employer Contribution:Employer Contribution:
 To ALL NHCEs eligible to deferTo ALL NHCEs eligible to defer
 No allocation conditionsNo allocation conditions
 Can also allocate to HCEsCan also allocate to HCEs
 Fully VestedFully Vested
 Subject to 401(k) withdrawal restrictionsSubject to 401(k) withdrawal restrictions
 Age 59½Age 59½
 Not available for hardship distributionsNot available for hardship distributions

Employee ElectiveEmployee Elective
DeferralDeferral
““Basic” SafeBasic” Safe
Harbor MatchHarbor Match
““Enhanced” SafeEnhanced” Safe
Harbor MatchHarbor Match
1%1% 1%1% 1%1%
2%2% 2%2% 2%2%
3%3% 3%3% 3%3%
4%4% 3.5%3.5% 4%4%
5%5% 4%4% 4%4%
6%6% 4%4% 4%4%
7%7% 4%4% 4%4%
8%8% 4%4% 4%4%
9%9% 4%4% 4%4%
10%10% 4%4% 4%4%

Match vs. Non-ElectiveMatch vs. Non-Elective
 MatchMatch
 No employer contributionNo employer contribution
if employee does notif employee does not
deferdefer
 Possible lower employerPossible lower employer
costscosts
 Higher employer cost ifHigher employer cost if
most employees defer atmost employees defer at
maximummaximum
 HCE contributionHCE contribution
flexibilityflexibility
 ““Stacking” match mayStacking” match may
allow greater HCEallow greater HCE
deferrals at lower costsdeferrals at lower costs
 Non-ElectiveNon-Elective
 Possible higher costs –Possible higher costs –
all employees get at leastall employees get at least
3%3%
 Costs more predictableCosts more predictable
 May use rate groupMay use rate group
testingtesting
 Minimum gateway inMinimum gateway in
cross tested planscross tested plans

Safe Harbor Plan DesignsSafe Harbor Plan Designs
 Increase contributions for owners andIncrease contributions for owners and
key employees:key employees:
 Permitted Disparity (Social SecurityPermitted Disparity (Social Security
integration)integration)
 Age-Weighted PlansAge-Weighted Plans
 Cross Tested PlansCross Tested Plans
 Triple Stacked MatchTriple Stacked Match

Annual Additions Limit –Annual Additions Limit –
IRC §415(c)(1)(A)IRC §415(c)(1)(A)
 2015 Limits2015 Limits
 Lesser of:Lesser of:
 $53,000 ($59,000 if age 50 or older*)$53,000 ($59,000 if age 50 or older*)
 100% of compensation100% of compensation
 * Using $6,000 “catch-up” amount* Using $6,000 “catch-up” amount

Safe Harbor 401(k) Deferral &Safe Harbor 401(k) Deferral &
Match (Only)Match (Only)
NameName
GrossGross
CompensationCompensation DeferralsDeferrals
Safe HarborSafe Harbor
MatchMatch
TotalTotal
AllocationAllocation
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $34,600*$34,600*
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $28,600*$28,600*
Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $4,500$4,500
Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $3,675$3,675
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $2,850$2,850
Employee DEmployee D $35,000$35,000 $0$0 $0$0 $0$0
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $74,225$74,225
*Each HCE $24,400 less than allowed under IRC §415(c)*Each HCE $24,400 less than allowed under IRC §415(c)

Safe Harbor 401(k) withSafe Harbor 401(k) with
Integrated Profit SharingIntegrated Profit Sharing
NameName
GrossGross
Comp.Comp. DeferralsDeferrals
MatchMatch
IntegratedIntegrated
ProfitProfit
SharingSharing
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $24,400$24,400 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $24,400$24,400 $53,000$53,000
Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $2,860$2,860 $7,360$7,360
Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $2,574$2,574 $6,249$6,249
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $2,288$2,288 $5,138$5,138
Employee DEmployee D $35,000$35,000 $0$0 $0$0 $2,002$2,002 $2,002$2,002
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $58,524$58,524 $132,749$132,749
 Total employee cost of $14,749Total employee cost of $14,749

Safe Harbor 401(k) withSafe Harbor 401(k) with
Integrated Profit SharingIntegrated Profit Sharing
 Using safe harbor matchUsing safe harbor match
 Could use non-elective (QNEC) to satisfyCould use non-elective (QNEC) to satisfy
safe harborsafe harbor
 Need to allocate QNEC before integrated profitNeed to allocate QNEC before integrated profit
sharingsharing

Cross Tested Profit SharingCross Tested Profit Sharing
FormulasFormulas
 Cross Tested Plan Formulas:Cross Tested Plan Formulas:
 Age-WeightedAge-Weighted
 Cross-TestedCross-Tested
 Classification FormulasClassification Formulas
 New ComparabilityNew Comparability
 ““Super” IntegratedSuper” Integrated

FormulasFormulas
 Allowed under IRC §401(a)(4)Allowed under IRC §401(a)(4)
 Precursor was Revenue Ruling 81-202Precursor was Revenue Ruling 81-202
 In many instances replace integratedIn many instances replace integrated
formulasformulas
 Since EGTRRA they are allowed inSince EGTRRA they are allowed in
prototype plan documentsprototype plan documents
 Typical designs are:Typical designs are:
 Age weighted formulasAge weighted formulas
 Classification formulasClassification formulas

Cross Tested Profit Sharing PlansCross Tested Profit Sharing Plans
 IRC §401(a)(4)IRC §401(a)(4)
 An employee benefit plan shall notAn employee benefit plan shall not
discriminate on the basis of benefits,discriminate on the basis of benefits,
rights or features.rights or features.
 Treasury Regulation 1-401(a)(4)-1Treasury Regulation 1-401(a)(4)-1
 300+ pages300+ pages

Cross Tested Profit Sharing PlansCross Tested Profit Sharing Plans
 IRC §401(a)(4)IRC §401(a)(4)
 ““A trust created or organized in the United States andA trust created or organized in the United States and
forming part of a stock bonus, pension, or profit sharingforming part of a stock bonus, pension, or profit sharing
plan of an employer for the exclusive benefits of itsplan of an employer for the exclusive benefits of its
employees or their beneficiaries shall constitute a qualifiedemployees or their beneficiaries shall constitute a qualified
trust under this section if the contributions or benefitstrust under this section if the contributions or benefits
provided under the plan do not discriminate in favor ofprovided under the plan do not discriminate in favor of
highly compensated employees (within the meaning ofhighly compensated employees (within the meaning of
§414(q)). For purposes of this paragraph, there shall be§414(q)). For purposes of this paragraph, there shall be
excluded from consideration employees described inexcluded from consideration employees described in
§410(b)(3)(A) and (C).”§410(b)(3)(A) and (C).”
 Treasury Regulation 1-401(a)(4)-1Treasury Regulation 1-401(a)(4)-1
 300+ pages300+ pages

FormulasFormulas
 GatewaysGateways
 Broadly Available Allocation RatesBroadly Available Allocation Rates
 Gradual Age/Service SchedulesGradual Age/Service Schedules

FormulasFormulas
 GatewaysGateways
 Treasury Regulation 1.401(a)(4)-2(c)(2)Treasury Regulation 1.401(a)(4)-2(c)(2)
 Allocation rate forAllocation rate for eacheach benefitingbenefiting NHCE must beNHCE must be
greater than or equal to the lessor of:greater than or equal to the lessor of:
 1/3 the highest allocation rate of any HCE benefiting1/3 the highest allocation rate of any HCE benefiting
under the planunder the plan
 5% of IRC §415(c)(3) pay5% of IRC §415(c)(3) pay
 Can use any IRC §414(s) definition of compensationCan use any IRC §414(s) definition of compensation
 Most commonly use W-2 wagesMost commonly use W-2 wages

FormulasFormulas
 Broadly Available Allocation RatesBroadly Available Allocation Rates
 Each allocation rate must meet the RatioEach allocation rate must meet the Ratio
Percentage Test or both parts of thePercentage Test or both parts of the
nondiscriminatory classification testnondiscriminatory classification test
 Assuming plan’s testing group meets AverageAssuming plan’s testing group meets Average
Benefits Percentage Test (ABPT) this designBenefits Percentage Test (ABPT) this design
would pass the general test on awould pass the general test on a contributioncontribution
basisbasis
 Therefore, no need to cross-testTherefore, no need to cross-test
 Very limited applicabilityVery limited applicability

FormulasFormulas
 Each band not greater than the prior band by more than 5%Each band not greater than the prior band by more than 5%
nor twice that prior bandnor twice that prior band
 Ratio of band to preceding band cannot exceed ratio of theRatio of band to preceding band cannot exceed ratio of the
two immediately preceding bandstwo immediately preceding bands
 Minimum allocations (for example Top Heavy) generallyMinimum allocations (for example Top Heavy) generally
permitted as long as contribution to lowest band is at least 1%permitted as long as contribution to lowest band is at least 1%
 Each band (other than the highest) must be the same lengthEach band (other than the highest) must be the same length
 If lowest band starts at age 25 it can be deemed to start at anyIf lowest band starts at age 25 it can be deemed to start at any
prior age and still satisfy the same length requirementprior age and still satisfy the same length requirement

FormulasFormulas
Gradual Age/Service ScheduleGradual Age/Service Schedule
AgeAge ContributionContribution % Difference% Difference RatioRatio
< 28< 28 1.25%1.25% N/AN/A N/AN/A
28 – 3528 – 35 2.50%2.50% 1.25%1.25% 200%200%
36 – 4336 – 43 5.00%5.00% 2.50%2.50% 200%200%
44 – 5144 – 51 10.00%10.00% 5.00%5.00% 200%200%
52 – 5952 – 59 15.00%15.00% 5.00%5.00% 150%150%
≥≥ 6060 20.00%20.00% 5.00%5.00% 133%133%

FormulasFormulas
 Works well for:Works well for:
 Transient populationsTransient populations
 Small groupsSmall groups
 Can reduce staff contributions to:Can reduce staff contributions to:
 Nearly 3% if Top HeavyNearly 3% if Top Heavy
 Below 3% if not Top HeavyBelow 3% if not Top Heavy
 Schedule must be specified in planSchedule must be specified in plan
documentdocument

Safe Harbor 401(k) with AgeSafe Harbor 401(k) with Age
Weighted Profit SharingWeighted Profit Sharing
NameName
Gross Comp.Gross Comp.
DeferralsDeferrals
Safe Harbor MatchSafe Harbor Match
Age WeightedAge Weighted
Profit SharingProfit Sharing

Safe Harbor 401(k) with AgeSafe Harbor 401(k) with Age
Weighted Profit SharingWeighted Profit Sharing
NameName
GrossGross
MatchMatch
AgeAge
WeightedWeighted
ProfitProfit
SharingSharing
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $24,400$24,400 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $7,483$7,483 $36,083$36,083
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $500$500 $3,350$3,350
Employee DEmployee D $35,000$35,000 $0$0 $0$0 $993$993 $988$988
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $42,500$42,500 $116,725$116,725

Safe Harbor 401(k) with CrossSafe Harbor 401(k) with Cross
Tested Profit SharingTested Profit Sharing
NameName
GrossGross
MatchMatch
CrossCross
TestedTested
ProfitProfit
SharingSharing
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $24,400$24,400 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $24,400$24,400 $53,000$53,000
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $1,600$1,600 $4,450$4,450
Employee DEmployee D $35,000$35,000 $0$0 $0$0 $1,400$1,400 $1,400$1,400
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $55,600$55,600 $129,825$129,825

Stacked Match Formulas -Stacked Match Formulas -
 Provide HCEs with contributions totaling the AnnualProvide HCEs with contributions totaling the Annual
Additions Limit – IRC §415(c)(1)(A)Additions Limit – IRC §415(c)(1)(A)
 Limit the plan contributions to elective deferrals andLimit the plan contributions to elective deferrals and
matching contributions which satisfy ADP and ACPmatching contributions which satisfy ADP and ACP
safe harborssafe harbors
 Qualify the plan for the Top Heavy exemptionQualify the plan for the Top Heavy exemption
 Impose a 6-year graded vesting schedule to theImpose a 6-year graded vesting schedule to the
greatest extent possiblegreatest extent possible
 Maximize employer contribution flexibility as muchMaximize employer contribution flexibility as much
as possibleas possible
 Minimize employer contribution to NHCEs as muchMinimize employer contribution to NHCEs as much
as possibleas possible

Triple Stacked MatchTriple Stacked Match
 Four part contributionFour part contribution
 Employee Elective DeferralsEmployee Elective Deferrals
 Safe Harbor MatchSafe Harbor Match
 Basic Safe Harbor Match or Enhanced Safe Harbor MatchBasic Safe Harbor Match or Enhanced Safe Harbor Match
 Must be 100% vestedMust be 100% vested
 Discretionary MatchDiscretionary Match
 Can be subject to vestingCan be subject to vesting
 Match up to 4% of first 6% of elective deferralsMatch up to 4% of first 6% of elective deferrals
 Cannot match deferrals beyond 6%Cannot match deferrals beyond 6%
 Cannot have a discretionary match greater than 4%Cannot have a discretionary match greater than 4%
 Fixed MatchFixed Match
 Can be subject to vestingCan be subject to vesting
 Based on first 6% of deferralsBased on first 6% of deferrals
 Specified in plan documentSpecified in plan document

Matching ContributionMatching Contribution
RequirementsRequirements
 All matches must meet ADP/ACP Safe HarborAll matches must meet ADP/ACP Safe Harbor
requirementsrequirements
 Discretionary match limited to 4% of payDiscretionary match limited to 4% of pay
 Cannot match deferrals in excess of 6%Cannot match deferrals in excess of 6%
 Match % cannot increase as deferrals increaseMatch % cannot increase as deferrals increase
 Match rate for any HCE cannot exceed rate forMatch rate for any HCE cannot exceed rate for
NHCENHCE
 No last day of plan year or hours of serviceNo last day of plan year or hours of service
requirementsrequirements

Triple Stacked Match – Step ATriple Stacked Match – Step A
 Basic match equals 100% of the first 3% the employee defers, plus 50% of theBasic match equals 100% of the first 3% the employee defers, plus 50% of the
next 2% the employee defers.next 2% the employee defers.
NameName
GrossGross
BasicBasic
MatchMatch
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600
Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000
Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350
Employee DEmployee D $35,000$35,000 $0$0 $0$0
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225

Triple Stacked Match – Step BTriple Stacked Match – Step B
 Add Discretionary Match equal to 2/3 of deferrals up to 6% of compensation.Add Discretionary Match equal to 2/3 of deferrals up to 6% of compensation.
 Discretionary Match cannot exceed 4% of compensationDiscretionary Match cannot exceed 4% of compensation
 Discretionary Match is flexibleDiscretionary Match is flexible
 Discretionary Match can be subject to a vesting scheduleDiscretionary Match can be subject to a vesting schedule
NameName
GrossGross
BasicBasic
MatchMatch
Discretion.Discretion.
MatchMatch
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,600$10,600
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,600$10,600
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $25,200$25,200

Triple Stacked Match – Step CTriple Stacked Match – Step C
 Owners (HCEs) need an additional allocation of $13,800 each to reachOwners (HCEs) need an additional allocation of $13,800 each to reach
maximum IRC §415(c)(1)(A) Annual Additions Limit.maximum IRC §415(c)(1)(A) Annual Additions Limit.
 Use an additional Fixed Match.Use an additional Fixed Match.
NameName
GrossGross
BasicBasic
MatchMatch
MatchMatch
FixedFixed
MatchMatch
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $53,000$53,000
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $25,200$25,200

Triple Stacked Match – Step CTriple Stacked Match – Step C
 Cannot consider deferrals in excess of 6% of Safe Harbor Compensation.Cannot consider deferrals in excess of 6% of Safe Harbor Compensation.
 Fixed match equals 86.79% of deferrals up to 6% of compensationFixed match equals 86.79% of deferrals up to 6% of compensation
($13,800/$15,900 = 86.79%).($13,800/$15,900 = 86.79%).
 Employee Cost = $14,233.Employee Cost = $14,233.
NameName
GrossGross
BasicBasic
MatchMatch
MatchMatch
FixedFixed
MatchMatch
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $53,000$53,000
Employee AEmployee A $50,000$50,000 $2,500$2,500 $2,000$2,000 $1,667$1,667 $2,170$2,170 $8,337$8,337
Employee BEmployee B $45,000$45,000 $2,000$2,000 $1,675$1,675 $1,333$1,333 $1,736$1,736 $6,744$6,744
Employee CEmployee C $40,000$40,000 $1,500$1,500 $1,350$1,350 $1,000$1,000 $1,302$1,302 $5,152$5,152
Employee DEmployee D $35,000$35,000 $0$0 $0$0 $0$0 $0$0 $0$0
TotalsTotals $700,000$700,000 $48,000$48,000 $26,225$26,225 $25,200$25,200 $32,808$32,808 $132,233$132,233

Triple Stacked Match – Worst CaseTriple Stacked Match – Worst Case
ScenarioScenario
 Employee Cost = $17,606Employee Cost = $17,606
NameName
GrossGross
BasicBasic
MatchMatch
MatchMatch
FixedFixed
MatchMatch
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $53,000$53,000
Employee DEmployee D $35,000$35,000 $1,400$1,400 $1,225$1,225 $933$933 $1,215$1,215 $4,773$4,773
TotalsTotals $700,000$700,000 $48,000$48,000 $27,450$27,450 $26,133$26,133 $34,023$34,023 $137,006$137,006

Triple Stacked Match – “True” WorstTriple Stacked Match – “True” Worst
Case ScenarioCase Scenario
 Each employee deferring minimum of 6% of compensationEach employee deferring minimum of 6% of compensation
NameName
GrossGross
BasicBasic
MatchMatch
MatchMatch
FixedFixed
MatchMatch
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $59,000$59,000
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,600$10,600 $13,800$13,800 $53,000$53,000
Employee DEmployee D $35,000$35,000 $2,100$2,100 $1,400$1,400 $1,400$1,400 $1,823$1,823 $6,723$6,723
TotalsTotals $700,000$700,000 $52,200$52,200 $28,000$28,000 $28,000$28,000 $36,453$36,453 $144,653$144,653

Triple Stacked Match – FlexibleTriple Stacked Match – Flexible
FormulaFormula
 Each employee deferring minimum of 6% of compensationEach employee deferring minimum of 6% of compensation
NameName GrossGross
Comp.Comp.
DeferralsDeferrals BasicBasic
MatchMatch
MatchMatch
90%90%
FixedFixed
MatchMatch
TotalTotal
Owner 1Owner 1 $265,000$265,000 $24,000$24,000 $10,600$10,600 $10,090$10,090 $14,310$14,310 $57,500$57,500
Owner 2Owner 2 $265,000$265,000 $18,000$18,000 $10,600$10,600 $10,090$10,090 $14,310$14,310 $52,000$52,000
Employee DEmployee D $35,000$35,000 $2,100$2,100 $1,400$1,400 $1,333$1,333 $1,890$1,890 $6,723$6,723
TotalsTotals $700,000$700,000 $52,200$52,200 $28,000$28,000 $26,653$26,653 $37,800$37,800 $144,653$144,653

Stacked Match Formulas -Stacked Match Formulas -
 Design achieves all objectives:Design achieves all objectives:
 Not subject to ADP and ACP testingNot subject to ADP and ACP testing
 No non-elective contributions to test under IRCNo non-elective contributions to test under IRC
§401(a)(4)§401(a)(4)
 Not Top Heavy because of the “safe harbor”Not Top Heavy because of the “safe harbor”
exemptionexemption
 Designed to comply with IRC §415(c)(1)(A)Designed to comply with IRC §415(c)(1)(A)
 Only testing needed is coverage under IRCOnly testing needed is coverage under IRC
§410(b) – design is “bullet proof” from a testing§410(b) – design is “bullet proof” from a testing
standpointstandpoint
 A true “players only” designA true “players only” design
 If an employee defers nothing, the employee getsIf an employee defers nothing, the employee gets
nothingnothing

Stacked Match FormulasStacked Match Formulas
 AdvantagesAdvantages
 HCE flexibilityHCE flexibility
 Increased disparityIncreased disparity
 PotentialPotential to reachto reach
IRC §415(c)(1)(A)IRC §415(c)(1)(A)
limits with lowerlimits with lower
costscosts
 Not age sensitiveNot age sensitive
 Top Heavy exemptTop Heavy exempt
 No ADP/ACP testsNo ADP/ACP tests
 DisadvantagesDisadvantages
 Fixed matchingFixed matching
costscosts
 Employer costsEmployer costs
dependent ondependent on
actions of NHCEsactions of NHCEs
 Match at 200+% ofMatch at 200+% of
deferrals on first 6%deferrals on first 6%
of compensationof compensation
 No allocationNo allocation
conditionsconditions

Stacked Match FormulasStacked Match Formulas
 Attractive for:Attractive for:
 Smaller employersSmaller employers
 Less sophisticatedLess sophisticated
work force (lowerwork force (lower
costs)costs)
 Highly skilled workHighly skilled work
force (greaterforce (greater
employee flexibility)employee flexibility)
 Need for ownerNeed for owner
flexibilityflexibility
 Less Attractive for:Less Attractive for:
 Larger employersLarger employers
 SophisticatedSophisticated
employeesemployees
 Employer wants toEmployer wants to
provide a minimumprovide a minimum
benefit for allbenefit for all
employeesemployees

SummarySummary
Plan DesignPlan Design NHCE Employee CostNHCE Employee Cost
Integrated ProfitIntegrated Profit
SharingSharing $14,749$14,749
Age Weighted ProfitAge Weighted Profit
SharingSharing $15,642*$15,642*
Cross-Tested ProfitCross-Tested Profit
SharingSharing
$11,825$11,825
Stacked Match 401(k)Stacked Match 401(k) $14,233/$17,606/$22,453$14,233/$17,606/$22,453
* Problem of disparate allocations for the two HCEs* Problem of disparate allocations for the two HCEs

Design SummaryDesign Summary
 Don’t ignore Social Security Integration as aDon’t ignore Social Security Integration as a
plan design.plan design.
 May still be a viable design alternativeMay still be a viable design alternative
 Cross-Tested and Stacked Match designsCross-Tested and Stacked Match designs
very dependent on:very dependent on:
 Employee demographicsEmployee demographics
 Levels of employee elective deferralsLevels of employee elective deferrals
 Look at all optionsLook at all options
 Need for good plan design studiesNeed for good plan design studies
 Understand plan design basicsUnderstand plan design basics
 Partner with a goodPartner with a good locallocal TPATPA

Team WorkTeam Work

Richard A. Perry, ChFC, QPA, QPFC, AIFARichard A. Perry, ChFC, QPA, QPFC, AIFA®®
Retirement Resource Group, LLCRetirement Resource Group, LLC
250 Hampton Street250 Hampton Street
Auburn, MA 01501Auburn, MA 01501
Tel: (508) 832-2299 Fax: (508) 832-9885Tel: (508) 832-2299 Fax: (508) 832-9885
rperry@retirementgroup.netrperry@retirementgroup.net

Advanced Safe Harbor 401(k) Plan Designs (for the Financial Advisor)

Advanced Safe Harbor 401(k) Plan Designs (for the Financial Advisor)

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