WHICH PLAN SHOULD I RECOMMEND?
There are several considerations in deciding between a SIMPLE IRA/401(k) and a SAFE HARBOR 401(k) PROFIT SHARING PLAN: Cost, Deferral limits, Eligibility, Required Contributions and Flexibility.
The SIMPLE is the least expensive to install because it is free. You simply set up IRA's for each eligible employee. However, the deferral is limited to $11,500. All employees who earned over $5,000 the previous two years are eligible no matter the age or number of hours. So even part time employees can become eligible when least expected. The required match is 3%, but only for those who choose to defer. These are the only contributions allowed in the SIMPLE plan. Once a SIMPLE plan has been adopted, no other plan can be adopted during that plan year. After terminating a SIMPLE plan, no other plan can be adopted until the following year.
The SAFE HARBOR plan allows more flexibility and larger contribution possibilities. Because is it built on a Profit Sharing platform, a discretionary profit sharing contribution can be considered each year, and is allocated taking into account compensation and age, which could be a big advantage to your business owners. The profit sharing contribution can be considered and decided each and every year after all figures are in and is deductible for a particular year as long as it is paid in by the due date of that year's tax return. This helps with cash flow. The deferral limit is $16,500 ($5,000 higher than the SIMPLE). The required match is 4% (which is only slightly higher than the SIMPLE), and, like the SIMPLE, the match is only for those who actually defer. A significant advantage of the SAFE HARBOR over the SIMPLE is that the only eligible employees are those who are age 21 and who work 1,000 hours or more in their first 12 months of employment. They become eligible on the following January 1 or July 1. So most part time or seasonal workers never enter the plan, are not eligible to defer, nor would ever get any profit sharing allocation.
It is very possible that for many years, the owners may be the only eligible participants in the SAFE HARBOR and, therefore, they could max out the profit sharing contribution for each of them for those years. The maximum contribution in addition to the deferral is 25% of compensation with an individual limit of a $49,000 total allocation, including the deferral. Even if other employees are eligible, we will provide a contribution analysis so the owners can decide each year if the cost to the staff is worth what the owners are able to receive. Also, remember, that the profit sharing contributions are subject to a 6 year vesting schedule. So even if an occasional employee receives a profit sharing allocation, he only vests at 20% per year starting with the 2nd year of employment, counting only years in which he works 1,000 hours.
The cost to set up a SAFE HARBOR plan is $1,500. The annual administration is $975 plus $30 per participant. As long as at least one employee, other than the owner, is eligible, there is a start up tax credit of up to $500 per year (50% of administration costs) for the first three years of the plans operation.
We find that our clients are much more satisfied with the SAFE HARBOR plan because of the more stringent eligibility requirements, the higher contribution limits, the flexibility of having the profit sharing contribution potential, and that the required matching contribution is only 1% higher than the SIMPLE plan.
By Mel Reeves
Wealth Preservation Division