S Corp and Retirement Plans

[S T]

Have an S Corp client 1 shareholder 90% (is actively employed as sales rep W-2 with a 401K maximum contribution ) other shareholder 10% no retirement plan. 90% shareholder has not taken compensation yet in 2006, but WILL by 12/31. 10% shareholder on regular monthly compensation.

90% shareholder wants to implement profit sharing or retirement plan for himself, 10% shareholder and other employees (which are less than 10 total). Employees would probably not contribute, all Company contributions.

What would be the best choice?? SEP-IRA, Profit Sharing, Money Purchase, etc.

Seems like the SEP IRA would be, as minimal costs of administration, almost the same as contribution levels, and no reporting to Gov.

Thoughts?

Sandy

[Bees Knees]

The SEP is the best choice if the owner wants to contribute for everyone. The SIMPLE is the best choice if the owner only wants to contribute to his or her own retirement with kicking in the least amount possible for all other employees.

It also depends on how much the owner wants to contribute. For example, an S corp is usually used to beat the FICA tax game. Pay as low a wage as possible to avoid FICA, and take as much out as possible in distributions. Doing that, however, lowers the retirement plan contributions. A $20,000 wage is great for avoiding FICA, but it only leaves you with a $5,000 SEP contribution, as the distributions do not count for purposes of making retirement plan contributions.

The safe harbor 401(k) is probably the best for the owner, as it allows the most possible contribution for the lowest W-2 wage. For example a $20,000 W-2 wage allows the owner (if under age 50) a $15,000 elective deferral, and the company could still kick in the other $5,000. However, the safe harbor 401(k) would probably be expensive to administer.

[PaulF]

A safe harbor 401(k) in this scenario would not allow a $5000 contribution by the company to the owner's account. A safe harbor means the company would make a non elective contribution up to 3% of gross wages for each employee even if an employee does not participate in the plan.

I administer safe harbor 401(k) plans for two small businesses and the owners chose this plan because they wanted to max out the 401(k) contributions for themselves knowing that several of their employees would not particpate. So they make the 3% non elective contibution for everybody and there is no testing that has to be done as far as compliance for highly compensated employees.

[Unregistered]

Paul

Isn't the non-elective requirement AT LEAST 3% rather than up to 3%? IRC §401(k)(12)(C)?

New York Enrolled Agent

[PaulF]

Yes, I did not do a very good job of wording that. My point was for the company to make a non elective contribution at the absolute minimum - 3% - to avoid all the compliance testing involved with a 401(k).

[S T]

Safe Harbor 401K

Thanks for the info.

In this case the t/p (90% shareholder of S Corp) is still employed by another company, and through that Employer has a 401K that he has maxed out for 2006.

So for 2006 the t/p would not be able to contribute to the S Corp 401K as well, correct, but could contribute to a SEP.

Sandy

[Bees Knees]

So in other words, the safe harbor 401(k) could decide to make non elective contributions up to 25% of wages, in addition to the employee elective deferrals. In that case, the owner with a $20,000 salary could have $20,000 put into the 401(k) through employee elective deferrals and employer non elective contributions.

TTB, page 13-19 has an example.

This is probably the best way to have the max contributed for an owner employee of an S corp that is trying to keep W-2 wages low for FICA purposes.

[sea-tax]

Sandy what are the ages of the employees? I mean are we talking about most under 21years of age. How is turn over High or Low?

Most likely you will want to look at a Sep or defined-contribution plan ( profit sharing). I say these two because if you have young employees and high turnover say like a reastaurant then you should be able to discriminate against most of the employees, and not have to contribute for them.

Also I would suggest if you are not a licensed advisor or broker that you and the client go talk to one. I know that I have a questionnaire and program that once you put all the info in it will give you some ideas that will work best. It works kind of like a census and then gives you pros and cons of each reccommendation.

[Unregistered]

Sea-

Is that program something you bought on the street or was it provided by your BD? Did you have to get it approved through compliance if not BD provided? Sounds very interesting to me, as I have only been registered for about a year, and run into this issue from time to time.

JoshInNC

[sea-tax]

Is that program something you bought on the street or was it provided by your BD? Did you have to get it approved through compliance if not BD provided? Sounds very interesting to me, as I have only been registered for about a year, and run into this issue from time to time.

JoshInNC

to be honest I am not sure . I have my assistant do the leg work for me. I will have to ask him next week when I see him. I am just the closer he takes care of all the paper signing and the sorts. I believe it is through my BD .

[S T]

More info

Hi Sea-Tax,

Thanks for the info. Most of the employees have been there for some time, in the 30-45 age group, not really making a lot of money, under $35K, except the office employee that controls inventory and sales and then of course the 10% shareholder and the 90% shareholder.

I am thinking SEP or Profit Sharing, as the 90% shareholder has been a full time employee at another employer and maxed out the 401K there. Just some year end planning. I don't have a Broker license, just providing the basic information so we can talk to someone! I give the tools and the info so the t/p has an overview when they meet with a "Retirement Advisor".

I have found in a lot of cases, "present company excluded," that most Securities Agents do not know the regulations, and I have had to come in on the back end to undo. Examples would be open a Simple IRA, no you can't for 2005 because it wasn't established by October 1, yes you can do a SEP up to the due date of the return, you are overfunded on your IRA, so we need to make the correction, to t/p what do you mean you opened an IRA, you have no earned income, etc.

So any more thoughts for this client?

Sandy