Broker Check

Defined Contribution Plans

Defined Contribution Plans

Defined Contribution Plans operate, per their name, with a “defined contribution” or determinable amount allocated to eligible employees. These contributions along with any earnings are maintained in an account (either pooled or segregated) for each employee’s benefit. Contributions to the plan may consist of pre-tax employer and/or pre-tax and/or post-tax employee contributions.


The ultimate retirement benefit or benefit upon distribution of each participant will be dependent on the contributions and earnings experienced by the account, with investment control either by the employer or by the employee. For this reason, the future retirement benefit cannot be determined or guaranteed.


Employer contributions may be subject to a vesting schedule. Non-vested account balances forfeited by former employees can be used to reduce employer contributions or be reallocated to active participants.


For 2023, an employee’s contributions to the plan may not exceed $22,500 (or $30,000 for employees age 50 or over). 


The employer contribution, when combined with the employee contribution may not exceed the lesser of $66,000 for 2023 or 100% of an employee’s compensation. The company may make a deductible plan contribution up to 25% of the overall eligible payroll. 


The maximum eligible compensation that can be considered for any single employee is $330,000 in 2023.

 

401(k) Plans

The 401(k) feature allows employees to voluntarily elect to make contributions (deferrals) into a qualified plan through payroll deductions up to an annual $22,500 limit for 2023 ($30,000 if age 50 of over). The term 401(k) comes from Section 401(k) of the Internal Revenue Code relating to employee deferral of compensation.


It may be helpful to think of qualified retirement plans as having multiple potential buckets or sources of funding (i.e. profit sharing, deferrals, matching).

Traditional Pre-Tax Deferrals

Employee contributions to the plan will be made on pre-tax basis, and subsequently reduce the reportable income on an employee’s W-2. Their account will grow tax deferred until the time the funds are withdrawn and reported as income.

Roth Post-Tax Deferrals

If elected as a plan option, employees may elect to have their voluntary deferral be made to the plan on a post-tax basis. These contributions will grow tax free and be able to be withdrawn upon retirement with no further tax consequences. Roth is offer preferred if you believe you will be in a higher marginal tax rate during retirement.

Matching Contributions

Employers may choose to match some portion of the amount deferred by the employee to encourage greater employee participation, i.e., 50% match on the first 6% deferred by an employee. These employer contributions may be subject to a vesting schedule.


Employee deferrals and employer matching contributions are subject to annual nondiscrimination tests which limit how much “Highly Compensated Employees” can defer or benefit based on the “Non-Highly Compensated Employees” contributions. A “Highly Compensated Employee” is an employee that:

  • Owns more than 5% of the employer at any time during the current or prior plan year (attribution rules apply which treat an individual as owning stock owned by his spouse, children, grandchildren or parents); or
  • Received compensation in excess of the indexed limit in the preceding plan year (indexed limit is $150,000 for 2023).

401(k) Safe Harbor Plans

An option exists to offer certain “401(k) Safe Harbor” plan designs which are deemed to pass the discrimination testing mentioned above. By promising certain employer profit sharing or matching contributions that are 100% vested, Highly Compensated Employees can defer up to the annual limit regardless of participation of other employees.


403(b) Plans

These plans are similar to a 401(k) but are only available to be offered by non-profit employers. These plans can either be ERISA or Non-ERISA depending on the level of employer involvement in selecting the investment provider of if any employer contributions are made to the plan. 


At the current time, the main difference relates to how the assets are held, eligibility requirements, discrimination testing of employee deferrals, and a special allowable catchup contribution.


Profit Sharing Plans

Profit Sharing plans consist of employer contributions that are generally made on a discretionary basis. After the end year, with our guidance, the employer will decide on an amount, if any, to be contributed to the plan. Any contributions will be tested to be non-discriminatory. These plans can stand on their own or be a money type under a 401(k) or an ERISA 403(b) plan.


We surprisingly still find many plans using an inflexible Pro Rata allocation (where contributions are allocated in proportion to each employee’s compensation) or an Integrated allocation (where contribution are allocated taking into account Social Security, resulting in a larger percent contributions to employees with salary above the taxable wage base).


Almost all of our plan use a flexible New Comparability allocation. Allocations of varying percentages can be allocated to different groups of employees. Sometimes referred to as “Cross Tested” plans, these plans are tested for compliance on a benefits basis, like a DB plan. Small businesses wanting to direct a larger amount of contributions to older owners and key employees, while having ultimate control over contributions to the rest of the employees find this method powerful. 


Higher allocations can be given to select employees, as long as we can prove mathematically that the allocation is non-discriminatory when compared the benefits provided at retirement age.


Prevailing Wage Plans

Companies with non-union employees working on public projects required to pay a prevailing wage may contribute the portion allowable for fringe benefits to a qualifying retirement plan. If not using the fringe portion for benefits, amounts must be included in payroll as compensation. 


The benefits to an employer of implementing a prevailing wage plan are as follows:

  • Savings in payroll taxes (FICA, Medicare, Federal and State unemployment)
  • Lower workers’ compensation premiums
  • Contributions can potentially be used to offset other employer contributions
  • Ability to make more competitive bids to help win more prevailing wage work
  • Can be combined to be a money type under 401(k) plan instead of a separate plan


Multiple Employer Plans (MEPs)

A Multiple Employer Plan, or “MEP”, is a retirement plan (either defined contribution or defined benefit) that is maintained by two more unrelated employers that are not members of the same controlled group.


Businesses will elect to be an “adopting employer” of the plan. DOL rulings indicate that a MEP must cover a bona fide group of employers to constitute a single plan, currently otherwise separate 5500 filings would be required.


A single document and investment solution are used for all employers under the plan.