Maximizing Owner’s Contributions

Maximizing Contributions Received by Company Owners

Bauman, Noonan and AssociatesFor many small plans the name of the game is maximizing the contributions received by company owners while keeping total employer contributions to a minimum. Sometimes this can be done by simply changing the contribution allocation formula.

For example, the following is a comparison between a salary proportionate and age weighted allocation formula where the employer makes a $50,000 contribution.

Salary Proportionate Formula

  • Participant
  • A
  • B
  • C
  • D
  • E
  •  
  • Status
  • Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  •  
  • Compensation
  • $200,000
  • $70,000
  • $50,000
  • $40,000
  • $30,000
  • Total
  • Contribution
  • $25,641.02
  • $8,974.36
  • $6,410.26
  • $5,128.21
  • $3,846.15
  • $50,000.00

Age Weighted Formula

  • Participant
  • A
  • B
  • C
  • D
  • E
  •  
  • Status
  • Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  •  
  • Age
  • 58
  • 47
  • 42
  • 39
  • 28
  • Total
  • Contribution
  • $39,818.88
  • $5,236.01
  • $2,487.27
  • $1,557.84
  • $900.00
  • $50,000.00

In this case, the age weighted formula works well because the company owner is considerably older and much higher paid than other employees. By changing the contribution allocation formula, the owner’s share of employer contributions increases from just over 50% to almost 80%.

Adding a non-elective safe harbor 401k provision can also help maximize the contributions received by company owners. Using the previous example, a portion of the profit sharing contribution is designated as a safe harbor contribution. This allows the company owner to contribute up to the 401k dollar limit regardless of what other employees contribute to the plan while also receiving a profit sharing contribution.

Age Weighted Contribution Formula with a 401K

Non-Elective Safe Harbor Provision

  •  

    Participant
  • A
  • B
  • C
  • D
  • E
  •  
  •  

    Status
  • Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  •  
  •  

    Compensation
  • $200,000
  • $70,000
  • $50,000
  • $40,000
  • $30,000
  • Total
  •  

    Age
  • 58
  • 47
  • 42
  • 39
  • 28
  •  
  •  
    Profit Sharing
    Contribution
  • $23,000.00
  • $1,713.64
  • $311.61
  • $0.00
  • $0.00
  • $25,025.25
  •  
    Safe Harbor
    Contribution
  • $6,000.00
  • $2,100.00
  • $1,500.00
  • $1,200.00
  • $900.00
  • $11,700.00
  • 401k
    Contribution+
    Catch-Up
  • $24,000.00
  • 0.00
  • 0.00
  • 0.00
  • 0.00
  •  
  •  

    Total
  • $53,000.00
  • $3,813.64
  • $1,811.61
  • $1,200.00
  • $900.00
  •  

With the safe harbor 401k non-elective provision, total employer contributions declined from $50,000 to $36,725.25, while the amount received by the company owner increased to $53,000.

Older business owners often want to maximize their retirement plan contributions during their remaining working years. For defined contributions plans, this means reaching the annual additions limit, which for 2015 is $53,000 increasing to $59,000 for those eligible for the 401k catch-up provision. Non-elective safe harbor 401k contributions can help here, too.

Staying with the same example, the following is a comparison between the level of employer contributions for the company owner to reach the annual additions limit without and with non-elective safe harbor 401k contributions.

Without a Non-Elective Safe Harbor 401k Contribution

  •  
    Participant
  • A
  • B
  • C
  • D
  • E
  •  
  •  
    Status
  • Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  •  
  •  
    Compensation
  • $200,000
  • $70,000
  • $50,000
  • $40,000
  • $30,000
  •  
  •  
    Age
  • 58
  • 47
  • 42
  • 39
  • 28
  • Total
  • Profit Sharing
    Contribution
  • $53,000.00
  • $6,969.26
  • $3,310.63
  • $2,073.53
  • $900.00
  • $66,253.42

With a Non-Elective Safe Harbor Contribution

  •  
    Participant
  • A
  • B
  • C
  • D
  • E
  •  
  •  
    Status
  • Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  • Non-Owner
  •  
  •  
    Compensation
  • $200,000
  • $70,000
  • $50,000
  • $40,000
  • $30,000
  • Total
  •  
    Age
  • 58
  • 47
  • 42
  • 39
  • 28
  •  
  • Profit Sharing
    Contribution
  • $23,000.00
  • $1,713.36
  • $311.48
  • $0.00
  • $0.00
  • $25,024.84
  • Safe Harbor
    Contribution
  • $6,000.00
  • $2,100.00
  • $1,500.00
  • $1,200.00
  • $900.00
  • $11,700.00
  • 401k with
    Catch-up
  • $24,000.00
  • 0.00
  • 0.00
  • 0.00
  • 0.00
  •  
  •  
    Total
  • $59,000.00
  • $5,913.36
  • $3,311.48
  • $2,334.58
  • $1,246.87
  •  

With the safe harbor non-elective 401k provision, total employer contributions decreased by $18,447.13 while the owner’s contribution increased from $53,000 to $59,000.

Maximizing the contributions received by company owners is, to a large degree, dependent on the company’s demographics.