Defined Benefit 401ks set to make their debut

AccountingWEB.com

Posted by gailperry in on 10/29/2009 - 12:19

Small business owners have plenty of options to choose from when it comes to a qualified retirement plan for the company. It can range from a Savings Incentive Match Plan for Employees (SIMPLE) to a Simplified Employee Pension (SEP) to a 401(k). But now there’s a new kid on the block.

Strategy: Consider the defined benefit 401(k) plan (called the “DB/401(k)” for short) for small business clients. This hybrid plan combines some of the advantages of a traditional pension plan with a regular 401(k).
…The authority for this new plan, which becomes available on Jan. 1, 2010, was buried deep within the massive Pension Protection Act of 2006. But interest in DB/401(k)s is expected to heat up during the coming year. …
… It is available for the 2010 plan year to employers with at least two employees and no more than 500 employees.
The DB/401(k) combines a defined benefit plan based on final average pay with a safe-harbor 401(k). Two requirements:
1. The defined benefit part of the plan must provide a benefit equal to 1% of the final average pay times years of service up to a maximum of 20% of final pay. …
2. The 401(k) part of the plan requires automatic enrollment with an employee deferral of 4% of compensation. …

  Advisory: If these requirements are met, the company has to file only one document for the plan and one Form 5500, Annual Return/Report of Employee Benefit Plan, each year. Best of all, employers don’t have to undergo the rigorous testing procedures for 401(k)s. Simply make the allowable contributions, file the paperwork and you’re set.
Requirements for automatic-enrollment 401(k)s

Elective Deferrals By Employees     
Automatic deferral must equal between 3% and 10% of compensation with:
• At least 3% in the first year of participation
• At least 4% in the second year of participation
• At least 5% in the third year of participation
• At least 6%, but not more than 10%, in any subsequent year of participation
Employer Contributions
100% vesting after no more than two years under either of the following two options:

Option 1: Matching contributions for nonhighly compensated employees (non-HCEs)* must equal 100% of elective deferrals up to 1% of compensation + 50% of elective deferrals of more than 1% up to 6% of compensation.

Option 2: Automatic employer contribution must equal 3% of compensation.
*Matching contribution rate for highly compensated employees (HCEs) can’t exceed matching contribution rate for automatically enrolled non-HCEs.
Reprinted with permission from The Tax Strategist, October 2009. For continuing advice on this and numerous other tax strategies, go to http://www.taxstrategist.net/. Receive 2 FREE Bonus reports and a 40% discount on The Tax Strategist when you use Promo Code WN0013. …