Profit Sharing 401k
A 401(k) is a retirement plan that is sponsored by an employer in which W-2 employees and business owners can make contributions in a tax favored account to save for their retirement.
Participants in a 401k plan have the option of making elective salary deferral contributions to the 401k by payroll deduction when W-2 salary is paid. In 2015 a 401k participant can elect to defer up to 100% of their W-2 compensation up to a maximum of $18,000. 401k participants that will become age 50 during the calendar year are permitted to make an additional "catch-up" contribution of $6,000. The 2015 401k contribution limit is $24,000 for those age 50 or older. 401k contributions can be made pre-tax or after-tax (Roth). Employee pre-tax contributions are 100% tax deductible and investment earnings grow tax-deferred until they are withdrawn at retirement. After-tax (Roth) contributions are not tax deductible, but can be withdrawn at retirement tax free.
A Safe Harbor 401k can be beneficial for small business owners who would like to contribute the salary deferral limit ($18,000 or $24,000 if age 50+), but anticipate they will fail the non-discrimination tests in a 401(k) plan. The Safe Harbor 401k plan allows owners and highly compensated employees to make the maximum salary deferral contributions to a 401k even if the other employees want to make limited or no contributions to the 401k. With a Safe Harbor 401k, the employer must make contributions to eligible employees according to one of two formulas. An employer is required to match employee contributions (100% of the participants first 3% of salary and 50% of the next 2% of salary) or make a non-elective contribution (make a contribution of 3% of salary for all eligible employees whether they contribute to the 401k or not). Each year the employer must make either the matching contributions or the non-elective contributions. The plan document will specify which contributions will be made and this information must be provided to employees before the beginning of each year.
In addition to having a 401k the employer may want to add a profit sharing plan. Profit sharing plans are 100% funded by the employer and are generally 100% tax deductible. 401k plans can have custom features and BCM helps small businesses with their 401k plan design to maximize the benefits to our small business clients while maintaining compliance with the IRS rules. One example of this would be to potentially add a New Comparability Plan as a profit sharing option to the 401k plan.
If a small business owner would like to maximize the profit sharing contribution to the business owners or key employees while minimizing the contributions into the other employees they may be interested in establishing a New Comparability Plan. A New Comparability Plan is a profit sharing plan in which employees are divided into groups with each group receiving an employer contribution that is a different percentage of compensation. A small business can set up a New Comparability Plan to maximize contributions to the business owner and to benefit key employees while still satisfying IRS rules for a 401k profit sharing plan.
Individual 401k - Profit Sharing 401k for a one person business, an owner and spouse business or a partnership (no W-2 employees)
If a small business owner is the only employee or if the only employees are the owner and spouse or if the small business is a partnership that employs only the partners and has no W-2 employees then a small business owner may qualify for an Individual 401k. The annual Individual 401k contribution consists of 2 parts a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Individual 401k contribution limit. Individual 401k contribution limits are $53,000 in 2015 ($59,000 if age 50 or older).
The Individual 401k is not a new type of 401k plan, but is simply a traditional 401k plan covering a business owner with no W-2 employees (other than themselves, their spouse or their partner in a partnership). An Individual 401k is less expensive administratively then a traditional 401k profit sharing plan that has full time W-2 employees.
Individual 401k contribution calculation for a sole proprietorship, partnership or an LLC taxed as a sole proprietorship
- Salary Deferral Contribution
Although the term salary deferral is used, these businesses do not provide a W-2 salary to the business owner. For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax. In 2015, 100% of net adjusted business profits income up to the maximum of $18,000 or $24,000 if age 50 or older can be contributed in salary deferrals into an Individual 401k (2014 limits are $17,500 and $23,000 if age 50 or older).
- Profit Sharing Contribution
A profit sharing contribution can be made up to 20% of net adjusted businesses profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then subtracting 1/2 of the self employment tax. You will want to ask your tax professional for assistance with this calculation.
Learn more about the Individual 401k Contribution Limits for a sole proprietorship, partnership or an LLC taxed as a sole proprietorship.
Individual 401k contribution calculation for an S or C corporation or an LLC taxed as a corporation
- Salary Deferral Contribution
In 2015,100% of W-2 earnings up to the maximum of $18,000 or $24,000 if age 50 or older can be contributed to an Individual 401k (2014 limits are $17,500 and $23,000 if age 50 or older).
- Profit Sharing Contribution
A profit sharing contribution up to 25% of W-2 earnings can be contributed into an Individual 401k.
Learn more about the Individual 401k Contribution Limits for an S or C corporation or an LLC taxed as a corporation.
Small Business 401k Services
One of the important services we provide is to serve as objective 401k plan specialists to educate HR directors, CFO's and business owners on available 401k plans in the market place.
Small Business 401k Plan Provider Search
Once we have helped educate you regarding the possible 401k plan options for your firm and we know the criteria that is important to you, we begin our search to help you find a 401k provider best suited for your specific situation. Beacon Capital Management Advisors works with many small business 401k plan providers and our search to find your ideal plan is efficient, cost effective and hassle free.
Receiving a Small Business 401k Plan Proposal
Whether your company is starting a new 401k or you have an existing plan and are looking for better administration, more investment choices, lower costs or better employee education, BCM can assist you in this process. Complete the form below to receive a small business 401k proposal.