Maximizing Contributions Received by Company Owners
For many small plans the name of the game is maximizing the contributions received by company owners while keeping total employer contributions to a minimum. Sometimes this can be done by simply changing the contribution allocation formula.
For example, the following is a comparison between a salary proportionate and age weighted allocation formula where the employer makes a $50,000 contribution.
Salary Proportionate Formula
- Participant
- A
- B
- C
- D
- E
- Status
- Owner
- Non-Owner
- Non-Owner
- Non-Owner
- Non-Owner
- Compensation
- $200,000
- $70,000
- $50,000
- $40,000
- $30,000
- Total
- Contribution
- $25,641.02
- $8,974.36
- $6,410.26
- $5,128.21
- $3,846.15
- $50,000.00
Age Weighted Formula
- Participant
- A
- B
- C
- D
- E
- Status
- Owner
- Non-Owner
- Non-Owner
- Non-Owner
- Non-Owner
- Age
- 58
- 47
- 42
- 39
- 28
- Total
- Contribution
- $39,818.88
- $5,236.01
- $2,487.27
- $1,557.84
- $900.00
- $50,000.00
This is a simple illustration based on a change in the contribution allocation formula. Sometimes maximizing the contribution of company owners can be more involved by the use of safe harbor 401k contributions as well as selecting a profit-sharing allocation formula most favorable to company owners. Company owner optimization strategies usually work best when owners are considerably older than their employees and whose compensation is substantially higher.
After reviewing the demographics of your company, we will suggest any modifications to your plan’s structure, if warranted.