2. Key Terms to Know
ADP Testing compares the average
salary deferral percentages of "highly
compensated employees" to non-highly
compensated employees, in effort to
prevent discrimination.
Deferrals are when an employee elects
to receive a set amount of their
paycheck as deferred compensation
which allows the employer to invest
the untaxed money into the
employee's 401k.
Highly Compensated Employee
(HCE) are classified as employees that
owned more than 5% of the interest in
a business in the last or current year
regardless of how much compensation
that person earned or received. Or an
employee who was paid $130,000 or
more.
3. Why Retirement Plans
are Important for
Small Businesses
Compared to the 98 percent of
companies with over 5000 employees
that offer retirement benefits, only a
third of companies with fewer than 20
employees offer any benefits.
Retirement plans offer significant tax
advantages to small business owners
and give them and their employees
incentive to save for the future.
Small companies are able to retain
and attract qualified employees by
offering retirement plans and or extra
benefits, on top of the base pay of an
employee.
4. Retirement Plans
Payroll Deduction IRA is one of the easiest ways to offer retirement benefits for your
employees. With no minimum amount of employee's requiredand low administrative
costs, any organization can use this.
Benefits:
▪ Simple for employee's to set up
▪ Employee's make contributions
▪ Tax advantages for employee's
Profit-Sharing Plans are great plans for companies who are financially stable. These
plans give flexibility in regard to how much to contribute to the plan (out of profits
or otherwise) each year.
Pros:
▪ Contributions are discretionary. (Not committed to set dollar-amounts.)
▪ Contributions and earnings are not taxed until distribution
❑ Cons:
▪ Higher administrativecosts
▪ Subject to nondiscrimination testing
▪ Employer pays all contributions
5. Retirement Plans Cont.
❑ Safe harbor 401(k) plan is a great option that is being used more by small to medium sized
companies due to its convenience. One of the main benefits of this type of plan is that is
automatically passes ADP testing, saving administration costs and time. Employer contributions are
fixed and mandatory based upon the "type" of plan chosen. (Basic, Enhanced, or Non-Elective)
❑ Pros:
▪ Automatically pass ADP testing
▪ Able to allow HCE's to max out their deferrals
▪ Employer contributions are tax deductible
▪ Great recruiting tool
❑ Cons:
▪ Must commit to plan for a year
▪ Can be expensive depending on employee contributions
▪ Employer contributions are immediately 100% vested
6. Retirement Plan for Ammeter Inc.
The best choice for Ammeter
Inc. is a safe harbor 401(k) plan.
The convenience of automatically
passing the ADP and other non-
discrimination tests saves
administration time. Employees
will value the ability to maximize
contributions.
The recruiting value of this plan
outweighs the administrative
costs. We would suggest a Basic
match plan in which the company
matches 100% on the first 3% of
deferred compensation, plus 50%
match on the next 2%.
