Profit Sharing and 401(k) Plans
63951 MK3196(0108) TC38740(0108)
Profit Sharing and 401(k) Plans can help you attract and retain valuable employees. With all of the plan options available, it may be possible to create a plan that can favor you and still provide the benefit you want to your employees.
The information contained herein is not intended as tax or legal advice. Please consult with your Attorney or Accountant prior to acting upon any of the information contained in this brochure. Securities offered solely by Equity Services, Inc., Member FINRA/SIPC, One National Life Drive, Montpelier, Vermont 05604, (802) 229-3900. Equity Services, Inc. is a Broker/Dealer affiliate of National Life Insurance Company, Montpelier, Vermont, and National Retirement Plan Advisors.
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Combine Features for the Plan You Want
There is a type of Profit Sharing plan to suit almost any business. Profit Sharing plans can be designed to direct contributions in a variety of ways. They can be integrated with social security, cross-tested or age-weighted. If you are a business owner who earns a substantially higher salary than rank and file employees, but are close in age to those employees, then an Integrated Profit Sharing Plan may work for your business. If you are older than the majority of your rank and file employees, an Age-Weighted or Cross-Tested Profit Sharing Plan might be the solution.* You can also add a 401(k) feature to your Profit Sharing plan so that you and your employees can potentially save even more for retirement. The ability to make salary deferrals is a valuable benefit that will be appreciated by your employees.
2 * Submitting a full census is required to determine an appropriate qualified plan for your business.
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Profit Sharing and 401(k) Plans
Flexibility in Contributions
With a Profit Sharing plan, contributions are always an opportunity but never an obligation. Contributions to a Profit Sharing plan are flexible and can change from year to year. The maximum contribution is 25% of the total eligible payroll for all plan participants. You have the flexibility to contribute anything from $0 to 25% in any given year. The individual maximum limit for any plan participant is 100% of pay up to $46,000 (for 2008), or $51,000 for those age 50 and older who make catch-up contributions (for 2008). When you add a 401(k) feature to your plan, any plan participant can defer as much as 100% of pay up to $15,500 (for 2008). Salary deferrals may be made beforetax or after-tax (Roth 401(k)). Qualifying distributions of Roth 401(k) deferrals are income-tax free.* For plan participants who are age 50 or older, an additional $5,000 catch-up deferral may be added.
Contributions are Tax Deductible
Contributions to the profit sharing plan are made by the employer and are fully tax-deductible to the business and not currently taxed as income to participants at the time the contributions are made to the plan. Distributions taken from the profit sharing plan are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% federal income tax penalty.
You Have the Flexibility to Choose How Much to Contribute Each Year
*To have qualifying distributions, the Roth 401(k) must be in place for at least five tax years, and the distribution must take place after age 59 ½, or due to death or disability. 3
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Guaranteed Benefits for Your Beneficiaries
Life insurance can be included in your Profit Sharing or 401(k) plan to provide guaranteed* benefits to your beneficiaries should you die before you have had the opportunity to build a substantial retirement benefit. The premiums for the life insurance in your plan are tax-deductible, making the qualified plan a tax effective means to purchase needed protection.
Sharon and Susan are a mother and daughter who own a construction company. Susan wants a qualified plan for the business. She doesn’t mind having a plan that will favor her mother, since her mother is nearing retirement age. Sharon and Susan like the idea of a profit sharing plan, but they would also like to offer a deferral plan so that their employees could save money on a tax qualified basis for their retirement. Sharon would like to defer the maximum. That would not be possible under a Traditional 401(k) plan because of the Average Deferral Percentage (ADP) Test. But with a Safe Harbor 401(k) Sharon can defer the maximum, regardless of the deferrals made by the rank and file employees and maximize her profit sharing contribution. Because the ADP test is not required on a Safe Harbor 401(k) plan, the owner is required to provide a safe harbor contribution to employees. It can either be a matching contribution, which goes only to those employees who defer, or a nonelective contribution, which goes to everyone who is eligible, even if they do not defer.
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*Guarantees are dependent upon the claims-paying ability of the issuing company.
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Sample Case
Safe Harbor 401(k) with Profit Sharing Select Age Sharon Susan EE 1 EE 2 EE 3 Total Total to Keys % to Keys 57 30 52 37 26 Salary $230,000 $150,000 $50,000 $32,000 $18,000 Elective Deferral $15,500 $15,500 $1,500 $ 960 $ 540 $34,000 $31,000 91% Catch Up Contrib. $5,000 $0 $0 $0 $0 $5,000 $5,000 100% Non-Elective Contrib. $6,900 $4,500 $1,500 $ 960 $ 540 $14,400 $11,400 79% Profit Sharing Select Contrib.* $23,600 $ 7,493 $ 2,095 $ 1,341 $754 $35,283 $31,093 88% Total $51,000 $27,493 $5,095 $3,261 $1,834 $88,683 $78,493 89%
In a cross-tested profit sharing plan (Profit Sharing Select) the owner can group employees in categories, giving employees a lower contribution allocation. In order to pass the required discrimination testing, and provide a higher percentage of the contribution to the owner, the owner should be at least 5-10 years older than rank and file employees and earn a higher salary.
*Profit Sharing Select allocations: Sharon – 10.27% of pay; Susan – 5.0% of pay; Rank and File – 4.19% of pay The 3% employer non-elective contribution is the Safe Harbor provision that has been used in this example. This contribution goes to everyone who is eligible, even if they do not defer. The annual administrative fee for a profit sharing plan in combination with a 401(k) plan may be greater than the annual administrative fee for a profit sharing plan only. The example is purely hypothetical and for illustrative purposes only. The illustrated plan is not indicative of any particular situation and your results likely will differ from the results shown above.
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Questions Business Owners Ask About
Q. What is special about a Profit Sharing Plan?
A. Flexibility.
A Profit Sharing plan allows a business owner to change the plan contribution each year, contributing from $0 up to 25% of the total payroll for all plan participants. Adding a 401(k) feature can make the plan more flexible by permitting employees to save in the plan as well.
Q. Will I have to make contributions for all my employees?
A. Not necessarily.
You can establish “eligibility requirements” that employees must meet before they may participate in your businesses’ Profit Sharing and 401(k) plan. And remember, the contributions you do make on behalf of employees are tax-deductible. If you did not have the qualified plan, and planned on retaining that income at a corporate level, you would pay taxes on the amount of money that is now being used as a contribution to the qualified plan for employees.
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Q. Is operating a Profit Sharing and 401(k) Plan expensive?
A. No.
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Q. What kind of assets can be used in the plan?
A. In the Profit Sharing plan you have many choices.
You can place your plan assets in virtually any type of investments, including mutual funds, stocks, bonds, CDs, and real estate. You can also purchase life insurance.
Typically, ongoing administrative costs are minimal relative to the size of your plan benefits. Furthermore, plan administration expenses themselves can be tax-deductible.
Q. Can I guarantee my plan benefits?
A. Yes.
You can guarantee* your benefits by adding life insurance to your plan. Because the premiums will be paid with tax-deductible dollars, purchasing life insurance inside your plan is a very cost effective way to provide protection for your beneficiaries.
401(k) Profit Sharing Plan Summary
Employer Contributions
• Discretionary • Flexible • Limited to 25% of eligible payroll
Individual Allocations
• 00% of pay to maximum of $46,000, 1 plus catch-up in 401(k)
Q. If my business runs into financial difficulties, can creditors get at my Profit Sharing or 401(k) funds?
A. No.
Your plan assets are separate from your business and personal assets and are generally beyond the reach of both business and personal creditors.
Protection from Creditors
• enerally yes, while still in the plan G
Investment Discretion
• rustee has full discretion in selecting investments T or participants may have discretion
Life Insurance Permitted
• es Y
Salary Deferral Limit
• 100% of pay up to $15,500 (for 2008)
Catch-up Limit
*Guarantees are dependent upon the claims-paying
ability of the issuing company.
• $5,000 for plan participants who are age 50 or older
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Benefit From Our Experience
The resources of members of the National Life Group® are available through your National Life Insurance Company representative. We will strive to make sure that your plan matches your needs and seeks to maximize your qualified tax benefits. We can also look at the different ways to fund your retirement plan with the knowledge and experience we’ve gained from more than seventy years of professional service. Our third party administrator, National Retirement Plan Advisors, is uniquely qualified to provide essential services in an ever changing regulatory environment. The people who design and administer our retirement plans take pride in the service they provide. National Retirement Plan Advisors offers a complete range of services to handle the administrative duties from initial plan design through the annual review. • Plan Design • Plan Documents • Initial IRS Filing • Disclosure Requirements • Annual Government Reports • Annual Service Review
National Life Insurance Company Home Office: One National Life Drive, Montpelier, Vermont 05604 • Telephone: (802)229-3333 • www.nationallife.com National Life Group® is a trade name of National Life Insurance Company and its affiliates. Each company of the National Life Group is solely responsible for its own financial condition and contractual obligations.