When you establish a qualified plan, the contributions you make for yourself and for your employees are deductible business expenses for federal and state tax purposes (they are not deductible for FICA, FUTA and Medicare tax purposes). The expenses of setting up and maintaining these plans are also usually deductible as normal business expenses, and in some cases, there may be additional tax credits offered.

Most of our clients want us to maximize the benefits to the owners while minimizing the cost of benefits provided to employees. We can do this in several ways:

1. We make the eligibility for the plan as long as permitted under IRS Regulations, thus excluding high-turnover employees that increase administration costs.

2. We can exclude highly paid employees, as long as coverage tests are satisfied.

3. We can provide lower benefits to highly paid employees and some lower-paid employees, as long as nondiscrimination tests are satisfied.

4. We can establish a "Safe Harbor" 401(k) feature, thus allowing owners to defer their maximum amounts even if lower-paid employees do not elect to defer.

Example: Company XYZ is establishing two plans - a Defined Benefit Plan and a 401(k) Profit Sharing Plan.

Using the current payroll, the owners can receive 85.4% of total benefits in 2021. The Defined Benefit plan contribution is $376,000 for the owners and $8,800 for the rank and file. (We excluded one highly compensated employee from the DB plan.) The first cut showed the 401k profit sharing contribution of $39,000 for the owners and $71,200 for the rank and file. The total contribution was projected to be $486,000, which at a 40% combined tax rate, reduces the company's 2021 tax by $194,400.

We became aware of a younger, part-time employee, who when added to the plans, brought the required profit sharing contribution for the rank and file down to $26,100 from $71,200, and had a negligible effect on the Defined Benefit plan. This saved the company $45,000 annually and brought the percentage to owners up to 94%.

All qualified plans, i.e. 401(k), Profit Sharing, and Defined Benefit (DB) plans must comply with IRS and DOL rules in order to remain qualified (i.e., be able to keep favorable tax status).

Favorable tax status allows for Employer and employee deductions of current contributions, as well as tax deferral of earnings on accumulated contributions.  If the IRS (Internal Revenue Service) threatens to revoke the favorable tax status of any qualified Plan the sponsor and all the employees could be taxed on all prior contributions and all accumulated plan benefits. The DOL (Department of Labor, specifically EBSA, Employee Benefits Security Administration) also has the ability to impose civil and/or criminal sanctions on plan sponsors who fail to comply.

Think about that – employees could be taxed on Employer contributions made on their behalf!

The 10 most common Plan errors are:

-Failure to implement employee 401(k) deferral elections/changes;

-Failure to remit 401(k) deferrals timely;

-Allowing employees into the plan either too early or too late;

-Failure to implement Required Minimum Distributions under either profit sharing or DB plans timely;

-Failure to file Form 5500 timely;

-Prohibited transactions between plans and their sponsors;

-Incorrect vesting calculations;

-Failure to implement all the Safe Harbor rules for 401(k) plans;

-Loan Failures;

-Document failures (current due date for Defined Contribution Plan Restatements is July of 2022).

Each failure may possibly be corrected under a different IRS/DOL Voluntary Correction program to avoid Plan Disqualification, depending on how long the error has occurred, who is affected, and other facts and circumstances.

Our team of experts can help you with the following:

1. Reviewing plan documents and operations to determine if there are violations

2. Suggesting appropriate correct methods/programs

3. Determining which program is appropriate, and completing the filing for you to avoid penalties and/or plan disqualification