HURON PENSION CONSULTANTS
HURON PENSION
CONSULTANTS
Premiere Consulting for Small to Mid-Size Businesses & Independent Contractors
CONSULTING SERVICES
401 K / Profit Sharing
The Profit Sharing Plan is the most flexible qualified plan available. An employer can contribute up to 25% of the total compensation of all eligible employees. The maximum amount which can be allocated to any one participant is 100% of the participant’s compensation or $55,000, whichever is less. The $55,000 limit is adjusted each year to reflect changes in the cost-of-living index.
The decision to make a contribution to a profit sharing plan is made by the employer each year. It is not necessary to make a contribution every year. Many employers tie the level of contribution to the profitability of the business, but it is not required that the employer show a profit in order to make a contribution.
Advantages
Contributions are discretionary. This enables an employer to vary contributions from year to year.
Nonvested account balances forfeited by terminating employees can be reallocated to the accounts of active participants or can be used to reduce future employer contributions.
A profit sharing plan can be used in combination with another type of plan, such as a Cash Balance Plan, to achieve a higher contribution level.
Possible Disadvantages
A higher maximum contribution level can be achieved with other types of plans such as a Money Purchase Pension Plan or a Defined Benefit Plan.
New Comparability
The purpose of a retirement plan is to provide retirement income. It costs more to provide a specified level of income to an older employee than a younger employee. This is because a younger employee has many more years to invest his or her money.
To take this into account, our tax code allows larger contributions to be made on behalf of older employees. In many businesses, the key executives are older than most of the other employees. The tax code allows a greater contribution to be made for these older key executives.
Defined Benefit Plans
A defined benefit plan promises to pay participants a specified monthly income when they retire. The amount of monthly benefits is usually based on the participant’s pay and years of service. A defined benefit plan can provide for a lifetime annual retirement income of up to the highest consecutive three-year average compensation or $241,000, whichever is less. The $241,000 limit applies to plan years ending in 2018 and is adjusted each year to reflect changes in the cost-of-living index.
The plan sponsor must make certain that there is enough money in the plan to pay the promised benefits. Annual contribution levels are determined by an actuary based on actuarial assumptions about future pay increases, investment performance, years until retirement and life expectancy after retirement.
Contributions to a Defined Benefit Plan are mandatory and must satisfy minimum standards. Larger contributions must be made on behalf of older participants because an older participant has fewer years remaining until retirement. This can be advantageous to key executives, who are often older than the other participants.
Advantages
Contribution for executives can be substantially higher in a defined benefit plan than in other types of retirement plans.
Defined Benefit plans tend to favor older, higher-paid employees.
Possible Disadvantages
The promised benefit must be provided to all participants regardless of the actual investment performance of the plan. Poor investment performance could result in increased contribution requirements.
Termination of a defined benefit plan that is over-funded could result in an excise tax to the employer ranging from 20% to 50% on the excess assets.
Cash Balance Plans
Many owners and partners are looking for larger tax deductions and accelerated retirement savings. Cash Balance plans may be the perfect solution for them. Also known as “hybrid” plans, they combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k).
Thanks to regulatory and legislative changes in 2006, 2010 and 2014, Cash Balance plans have become the fastest growing sector of the retirement plan market, as thousands of professionals and successful business owners across the country adopt these plans each year.
A Cash Balance plan is a defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on those contributions. Each participant has an account that resembles those in a 401(k) or profit-sharing plan. Those accounts are maintained by the plan actuary, who generates annual participant statements.
ABOUT HURON PENSION CONSULTANTS
Hi, this Mark Ronsini and I have been in the retirement planning and consulting industry for more than 35 years, helping hundreds of clients of every size choose and implement retirement plans of every variety. I bring unparalleled knowledge and the freshest strategies and available in today’s marketplace to a host of clients nationwide.
INDUSTRIES SERVED
Huron Pension Consultants serves many diverse industries, including: medical, legal, contractors and consultants.
