Profit sharing and incentive plans
A 401K works for us, with an employer match and a year-end distribution. We have 10 employees. 4 are family.
We have looked into a 401K, but being so small (around 20 employees), we can't justify the administrative costs. Plus, with the family members involved, there are some limitations if you don't have 100% participation from the rest of the shop.
We have ended up with a simple 401K instead of a conventional 401K. But of course the simple 401K has its problems, too. My main problem is that the employee is 100% vested as soon as the money hits their account. One of our main reasons for doing this was to help us with employee retention to begin with.
We have a profit sharing plan that we make a contribution to. There were no employee contributions until this year. The vesting takes 6 years and if they leave before the end of the year they don't vest for that year and we only start counting on January 1 and July 1 for vesting. The maximum contribution is 15% of total eligible wages. Our administration is about $600 per year plus $10 per employee. If you have a state income tax on top of federal, it costs you .50 to give someone a dollar instead of giving the dollar to the IRS. If you factor in the family portion of the contribution and the amount the family retains from employees who leave before being vested, it costs less than .4 per dollar. We added matching contributions up to 5% this year.
These type of plans benefit both parties and help in tax planning. If you implement a 401k where the employees can direct the investments, it can be a burden to manage. Also, we use a broker that manages the plan for 1% of the asset value per year. He keeps the investments in compliance with fed guidelines and does pretty well. We started our plan 15 years ago and it's now pretty sizable and the guys that have been around are starting to build a nice nest egg.
About 2 years ago we had our CPA do an analysis and with profit sharing, health, vision, dental, bonuses, vacation, safety awards, paid holidays, the employee gets almost 35% more in benefits. We feel the complete package helps keep and retain employees.
One big stumbling block for us was meeting the test with how much the family was taking vs. how much the employees were taking. I don't have the figures right in front of me, however we did a survey of the employees at the time, and we didn't meet the test. I was simply amazed--we will match 4% of your income, and then employees came back with "but you're going to take another 4% out of my check and I can't afford it". With a standard 401K, the amount we (family) can take is dictated by the employees and the amount they take. Your numbers come out about the same as what we were looking at--roughly 10-12K a year to administrate our 401K, and that does not include any contributions.
We ended up going the Simple 401K route. We are limited to a max of 3% match. The employees are 100% vested as soon as the money reaches their account. There are no tests to meet. The amount that the family takes is not dictated by the employees. In short, a lot less paperwork, and it's administrated for around 12-15 hundred a year. One thing to keep in mind here, too, is the fact that we only employ about 20 people, 4 of which are family.
Our administrative costs are about $1,200, not $12,000. A profit sharing plan is different than a 401k, although often called a 401k by tax people. We are 2 brothers that own the business. We are a corporation (S). We have a 6 year vesting. We passed the tests and were approved. It is rather simple.
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