Maximizing Tax Deductions and Optimizing Small Company Owner Benefits
The Setup
Kingston Enterprises, a small company (not a personal service company), has three owners (Dave, Bob and Nick) and six other employees. In 2014, the company was having the best year they’d ever had. Each of the owners was on pace to make in excess of $600,000. They expected this to continue into the future. The owners are ages 47, 52, and 56 respectively.
The company has a safe harbor 401(k) plan and each of the owners is contributing the maximum 401(k) ($17,500 for the 46 year old and $23,000 for the 52 and 56 year olds).
All employees are receiving the 3% safe harbor contribution while Dave, Bob and Nick were set to receive 9% contributions through “cross testing.” This gave them each $23,400 in additional contributions to their 401(k).
Age
Wage
401(k)
Profit Sharing
Total Contribution
Dave
47
$260,000
$17,500
$23,400
$40,900
Bob
52
$260,000
$23,000
$23,400
$46,400
Nick
56
$260,000
$23,000
$23,400
$46,400
Total Owners
$63,500
$70,200
$133,700
Others
Various
$660,000
$40,000
$19,800
$59,800
Grand Total
$103,500
$90,000
$193,500
Age
Wage
401(k)
Profit Sharing
Total Contribution
47
$260,000
$17,500
$23,400
$40,900
52
$260,000
$23,000
$23,400
$46,400
56
$260,000
$23,000
$23,400
$46,400
$63,500
$70,200
$133,700
$660,000
$40,000
$19,800
$59,800
$103,500
$90,000
$193,500
The Conflict
The owners were going to have to pay significant taxes because 2014 was such a great year. Also, in previous years, they had put most of their profits back into the business causing them to be somewhat behind in their retirement savings.
The MGO Solution
MGO obtained the census and allocation data from Kingston. After an in-depth analysis, MGO made two recommendations. First, maximize the owners’ Profit Sharing in the 401(k) plan. Second, implement a Cash Balance Pension plan to complement the 401(k). MGO’s recommendations resulted in the following allocations:
Age
Wage
401(k)
Profit Sharing
Total Contribution
Cash Balance
Overall Total
Dave
47
$260,000
$17,500
$34,500
$52,000
$117,000
$169,000
Bob
52
$260,000
$23,000
$34,500
$57,500
$152,900
$210,400
Nick
56
$260,000
$23,000
$34,500
$57,500
$189,500
$247,000
Total Owners
$63,500
$103,500
$167,000
$459,400
$626,400
Others
Various
$660,000
$40,000
$33,000
$73,000
$16,500
$89,500
Grand Total
$103,500
$136,500
$240,000
$475,900
$715,900
47
$260,000
$17,500
$34,500
$52,000
$117,000
$169,000
52
$260,000
$23,000
$34,500
$57,500
$152,900
$210,400
56
$260,000
$23,000
$34,500
$57,500
$189,500
$247,000
$63,500
$103,500
$167,000
$459,400
$626,400
$660,000
$40,000
$33,000
$73,000
$16,500
$89,500
$103,500
$136,500
$240,000
$475,900
$715,900
