A 401(k) Plan allows employees (and owners) to defer pre-tax or Roth (after-tax) dollars for their own retirement savings. These plans can be set up with or without an employer match and, in addition, can allow a discretionary employer profit sharing contribution each year. Many 401(k) plans are set up as Safe Harbor plans. Safe Harbor plans allow owners and highly compensated employees to maximize their employee deferrals without requiring those deferrals to be tested for discrimination. The Safe Harbor plan could consist of a match, which matches the employees’ deferrals up to 4% of their wages, or it can be a fixed 3% contribution (not dependent on employee contributions). The plan can be used with any number of owners, key employees, and other employees. The following is only one example of how a 401(k) Plan can benefit your company (does not include any additional employer profit sharing contribution):
|SUMMARY OF CONTRIBUTIONS|
|Employee||Age||Compensation||401(k) Elective Deferral||3% Safe Harbor Contribution||Profit Sharing Contribution||Total||Contribution as % of Compensation|
|SUMMARY OF TOTAL CONTRIBUTIONS||Total||% of Total|
|Total Contribution for Owner (including deferrals)||$34,700||77.9%|
|Total Contribution for Employees||9,870||22.1%|
|Total Contributions & Deduction||$44,570||100.0%|
|SUMMARY OF TAX SAVINGS & CASH REQUIREMENTS|
|Total Contribution for Owner (including deferrals)||$34,700|
|Total Contribution & Deduction||$44,570|
|Less: Estimated INCOME TAX SAVINGS||– 20,000|
|Net Cash Paid Out||$24,570||– 24,570|
|Owner’s Contribution Paid by TAX SAVINGS||$ 10,130|
|Not only is the Owner receiving a contribution of $34,700 by only paying out a net cash amount of $24,570, the other employees are receiving contributions totaling $9,870 without any additional cash outlay after current tax savings.|
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Additional assumptions used in above calculations:
- Total Owner combined Federal & State Income Tax Rate assumed at 45%. You should consult your tax advisor as to the actual tax rates and your actual amount saved.
- Employees may also defer up to the legal maximum without any effect on the owner.
- The contribution and percents to the groups can vary year to year at the discretion of the employer, within legal limits.
- The numbers of participants included in the illustrations were limited for simplicity and comparability. However, all of the plans are able to serve from one to hundreds of participants.