Retirement Plan Design and Selection
Start with the client's objectives
Plan selection is a matching exercise. The candidate must be able to compare defined contribution plans (401(k), profit sharing, new comparability, ESOP), defined benefit plans and hybrid cash balance plans, and the simpler SEP and SIMPLE IRA formats against employer goals: cost predictability, maximum benefit for the owner, hiring and retention value, administrative burden, and flexibility to skip or vary contributions.
Design levers to name in the answer
Eligibility (age 21 and one year of service, with the 1,000-hour rule; a two-year eligibility period is available only if vesting is immediate), entry dates, the definition of compensation, employer contribution formulas, vesting schedules, coverage under IRC 410(b), nondiscrimination under 401(a)(4), permitted disparity, and the top-heavy minimum of 3% of compensation.
Traps that show up in questions
- SIMPLE IRA exclusive plan rule. An employer maintaining a SIMPLE cannot also maintain a qualified plan, SEP, or 403(b) covering the same employees.
- SEP limits. A SEP uses the same contribution percentage for all eligible employees; salary deferrals are not permitted (SARSEPs are grandfathered only).
- Safe harbor 401(k). Safe harbor contributions are always 100% vested. A 3% nonelective design is generally easier to administer than the basic match and also satisfies the top-heavy minimum when it is the only contribution.
- Top-heavy exemption. A safe harbor 401(k) with no other contributions (other than the safe harbor) is not subject to the top-heavy minimum.
- New comparability gateway. Cross-tested allocations must give each non-highly compensated employee at least the lesser of one-third of the highest allocation rate or 5% of compensation.
Rule of thumb
If an older owner wants the largest deductible contribution relative to staff cost, age-weighted or cross-tested profit sharing, or a cash balance plan paired with a 401(k), usually beats a straight pro-rata design - but the gateway and 401(a)(4) testing must be run before promising a number. Show the client both the owner benefit and the required staff contribution; questions often hinge on the staff cost side.