Case Studies / Success Stories

Case Study 1: Options for a Sole Proprietor with No Employees

A local accountant works with a Sole Proprietor client who has utilized a Simplified Employee Pension Plan (SEP), and has contributed 25% of compensation for each eligible year. He and his accountant are looking for ways to increase his contribution levels for 2017 and subsequent years. His client‘s compensation will be greater than $400,000 for 2017, and he is currently 45 years old and has no employees.

We decide that the first type of plan to look at is a Defined Benefit Plan. A Defined Benefit Plan would allow the Sole Proprietor to contribute $143,000 in 2017 (this maximum amount would increase each year) and accumulate up to $1,900,000 by age 55. If he desires a contribution greater than $143,000 for 2017, we would look at adding a 401(k) Profit Sharing Plan, sometimes referred to as a Solo (k) Plan. This would allow him to defer the 401(k) maximum of $18,000. In addition, a Profit Sharing contribution of $16,200 (6.0% of compensation up to the maximum allowable compensation of $270,000 for 2017) would also be permitted. Adding a Defined Benefit Plan plus a 401(k) Profit Sharing Plan would increase the allowable contribution from $143,000 to $177,200.

Oftentimes, perspective clients contact us indicating “I want the maximum contribution allowable.“ Once the maximum contribution determination is made, they come back to us and say “Did I say maximum? I meant to say $75,000.“ If a client wants to do less than the maximum allowable contribution, that is easily accomplished.


Case Study 2: A New 401(k) Profit Sharing Plan for an Employer with 10 Employees

An investment broker has a client (owner of a company) that currently has a SIMPLE IRA for himself, his spouse and his employees. The owner’s compensation is greater than $270,000 per year, and he and his spouse would like to increase their contributions. We will assume that the SIMPLE IRA was terminated as of December 31, 2016. What are their options?

The census data is as follows:

We start with a Safe Harbor 401(k) Plan where there are two options:

(1) Safe Harbor Match: 100% of the first 3.0% of deferral plus 50% of the next 2.0% of deferral, or 4.0% match on a 5.0% deferral or

(2) 3.0% Non-Elective Contribution which is provided to all eligible participants, even if they elect not to defer.

If the client only wishes to make a contribution of the maximum deferrals, and only wants to provide a contribution to employees who elect to save for their own retirement, we would recommend using Option 1 – Safe Harbor Match. Since this client wants a higher contribution, we will utilize Option 2 – 3.0% Safe Harbor Plan. We also add a new comparability allocation formula to provide an extra Profit Sharing contribution, up to the maximum allowable contribution to the owner, and allocate the minimum amount to the employees to pass testing (1.45% of pay). The resulting contributions are as follow:

* Assumed zero for illustration purposes only.

The client is pleased with the $73,000 total contribution for he and his spouse, but would like an even higher contribution. In this case, we would recommend the addition of a Cash Balance Defined Benefit Pension Plan in addition to the 401(k) Plan.


Case Study 3: Adding a Cash Balance Plan for an Employer with 10 Employees

The same client (employer) in Case Study 2 has reviewed the 401(k) Profit Sharing Plan proposal we prepared for them. The client and his spouse decide that they would like to see a structure that provides for higher contribution levels.

Assume the same census data from the prior case study. Also assume that the employer is a professional service organization (doctor, attorney, etc.), and is therefore, restricted on the maximum combined contributions that can be made to a 401(k) Profit Sharing Plan and a new Cash Balance Plan. The following is a permitted design that would establish a Cash Balance Plan in addition to the 401(k) Profit Sharing Plan:

* Assumed zero for illustration purposes only.

Note that the Profit Sharing Plan contribution for employees has increased from 4.45% to 5.0% and they are receiving a Cash Balance Plan accrual equal to 3.0% of pay. The owner is receiving a Cash Balance accrual of $124,000, and the spouse is excluded from the Cash Balance Plan.

As shown above, the owner and spouse are receiving just under 90% of the total outlay of $221,335.


Case Study 4: Multiple Owners with Different Goals

Many of the clients we work with have multiple owners. Some owners may want similar contribution levels, while others may have different objectives (e.g., one may want to contribute $150,000 while the other may only want a $50,000 contribution). For this example, assume the following census data:

The design utilized in Case Study 3 would leave Owner #2 short on her objectives. Total employee contributions of 8.0% would allow for the following:

*Assumed zero for illustration purposes only.

An additional 4.0% contribution to employees, or $12,000, would be required to achieve Owner #2’s $50,000 contribution goal. Since the cost to increase is greater than the benefit, we would recommend that the contributions be left as indicated above. Each year, we would review the demographics of the plan to determine if larger contributions are permitted.


Case Study 5: 200 Employees with Failed Discrimination Testing

A financial advisor has a client that currently sponsors a 401(k) plan with 200 non-excludable employees. There are 4 owners in the plan, each owning 25% of the employer, and 2 other employees that earned more than $120,000 in the previous plan year. No matter the level of education provided to the employees, the employer cannot encourage employees to defer into the plan. In fact, most employees do not bother completing enrollment forms at all, causing additional work for the accountants auditing the plan (which translates to additional fees for the employer) and increasing the risk of potential issues if the plan were audited by the IRS. The lack of participation by employees is also causing the owners to have significant contributions returned to them due to failed discrimination testing. What, if anything, can be done to increase participation and persuade employees to complete enrollment forms?

Option: Automatic Enrollment

This plan is a good candidate for the addition of automatic enrollment. For all employees that have not completed an enrollment form, we would suggest auto-enrolling them at a level of at least 3.0% of pay. Instead of having the employees “opt in” by completing an enrollment form, they must “opt out” of deferring by completing an enrollment form. In addition, we would suggest automatically increasing the auto-enrolled employee’s deferral amounts by 1.0% per year, until the employee is at a deferral rate of 6.0% of pay. Timing the automatic increase with annual pay increases softens the impact on the participant’s paycheck.

Automatic enrollment will increase participation, allowing the owner group to defer larger amounts, provide an IRS approved option for lack of deferral documentation and help employees save for retirement – the ultimate goal of a retirement plan.

Testing after Automatic Enrollment (assumes NHCE ADP will increase by 1.0%):

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