In Success Stories

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

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

The Result

Dave, Bob and Nick together received an additional $492,700 ($626,400 minus $133,700). The increased employee cost is $29,700. The owners received 94% of the additional contributions. Kingston also reduced its tax liability (assuming 40% federal and state tax rates) by $211,160.  Dave, Bob and Nick decided to hire MGO and having been singing the praises of Cash Balance plans ever since.

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