As a business owner, you must be comfortable with change – and we sure have experienced a great deal of it over the past two years. One category of change that we aren’t usually prepared for, but that is inevitable, impacts our 401(k) plans. Every 6 years the Internal Revenue Service (IRS) requires business owners to update their 401(k) plan document (aka plan rule book) to catch up the plan on all recently passed legislation. Over the last 6 years there has been a lot of new legislation passed. Fortunately, the IRS gives plan sponsors plenty of time to update their document; you have until July 31, 2022 to make the necessary changes. It’s imperative to review your current plan design to make sure it matches the goals of your business and employee benefits offering. Below is a list of plan features that we’re reviewing with our business owner clients.
Eligibility – A business owners can require two “doors” for an employee to walk through before they’re able to participate in a 401(k) plan. That first door is typically age, and most business owners require that an employee be 21 years old before becoming eligible for the plan. The next door is service; an employer can require that an employee work up to 1 year before being able to participate. These rules may sound quite familiar to you; however, did you know that you can have different doors for different types of contributions?
Dual Eligibility – As mentioned above, an employer can allow different doors for employee to become eligible for employee deferrals compared to the employer match or profit-sharing. Everyone agrees that the sooner we can save for retirement, the better, right? With that being said, you can allow an employee to enter the plan immediately for deferrals, but have them wait up to 1 year until they can be eligible for the employer match and profit sharing. This is a great strategy if you want to allow the employee to save right away, but want to wait to give them employer money.
Profit Sharing Formula – If an employer has a good year, they have the ability to share the profits with the employees by giving a profit sharing contribution. Up until the early 1990’s, the only form of profit sharing was Pro-Rata, meaning everyone received the same percentage of salary as their profit sharing contribution. However, over the past 30 years (and yes, it’s crazy to think the 90’s were 30 years ago – insert grandpa/grandma emoji), two new profit sharing formulas have become the mainstay: New Comparability and Social Security Integrated. New Comparability is an ideal formula for the business owner who is much older than his/her staff. Social Security Integrated is perfect for an employer whose owners make at least the Social Security taxable wage base (currently $142,800). If you’re an employer who would like employees to be employed on the last day of the plan year in order to receive profit sharing, Social Security Integrated is the formula for you.
Vesting – Everyone loves and values commitment. And in today’s world the largest companies are luring talent with lucrative signing bonuses.Millennials and Gen Z’s love instant gratification and who can argue with getting cash in their pocket immediately? Well, that’s where a vesting schedule comes into play! If an employer provides a matching or profit sharing contribution, they can tie a vesting schedule to that money and require that an employee work at the practice for up to 6 years before they can receive 100% of the contributions. Having a vesting schedule is a great way to protect and boost your benefits offering without giving 100% of the money up front and having that employee bolt to the next employer with a signing bonus.
If you have any questions about these plan design features or how New Comparability or Social Security Integrated Profit Sharing could fit into your practice, contact Kampstra Wealth Management at email@example.com or 717-334-0097.
Securities offered through Triad Advisors, LLC, Member FINRA/SIPC. Advisory services offered through Triad Hybrid Solutions, LLC, a registered investment advisor. Kampstra Wealth Management and Triad Advisors, LLC are not affiliated.