As a business owner or key executive of your company you likely have been frustrated with your ability to save significant dollars for retirement through your 401(k) plan. It may be time to consider the “Super K” plan, otherwise known as a Safe Harbor 401(k) plan coupled with a “new comparability” allocation formula. The Super K works best for businesses that have owners and key executives that are older and well paid, including closely held businesses and physician and other professional practice groups, such as accountants, attorneys, engineers, and financial service groups.
Elective Deferrals: First, the Super K will allow all employees to “max out” on their elective deferrals each year ($16,500 for 2009/2010 plus $5,500 age 50 catch up).
Employer Safe Harbor Contributions: Second, the Super K will offer a 100% vested contribution equal to 3% of each employee’s pay (regardless of whether they defer).
New Comparability Contribution. Third, the Super K will offer owners and their designated key executives the lion’s share of an additional discretionary employer contribution called the “new comparability” contribution, with relatively small additional contributions required for the rest of the workforce.
Results. The most economical new comparability allocation would be to provide the owners and key employees an additional 6% of pay contribution. Including the Safe Harbor contribution, this results in a total employer contribution of 9% of pay to the owners and key executives and 3% of pay to other employees.
Alternatively, a new comparability allocation that would push greater benefits to select groups (but require additional contributions for other employees) might permit a new comparability contribution to the owners and key executives of 17% of pay. Conversely, the remainder of the employees may only receive a new comparability contribution of 2% of pay. Along with the safe harbor contributions, this results in a total allocation of 20% of pay for owners/key executives and an allocation of 5% of pay for all others. Add to these contributions, the maximum elective deferral contribution and the age 50 catch up, and the maximum annual allocation of $54,500 can be achieved for the designated groups, depending of course, on the annual discrimination testing analysis required by the IRS. “Pay” as used in this article is limited to IRS “considered” pay ($245,000 for 2009/2010).
How Does This Work? First, and most importantly, the new comparability contributions that are available for the owners and key executives in any year will vary depending on the relative ages and compensation of the owners, key executives and other employees during that year. The new comparability design is tested annually for discrimination by looking at the shorter period of time in which older participants (such as owners and key executives) have to accumulate a total benefit until their retirement. Their shorter accrual period generally allows more contributions to flow to them in comparison to younger participants, who have a longer period until retirement. This testing methodology is referred to as “cross testing” and is specifically permitted by the IRS.
Is this New? The “Super K” is not a new plan design, but for many years after it was first “blessed” by the IRS, embarking on such a sophisticated plan design was unfamiliar territory for recordkeepers and third party administrators and required actuarial services, making the design expensive and daunting. But, as with any sophisticated new technology or product, the Super K has now become a common and mature plan design. Many plan recordkeepers and third party administrators now offer “off-the-shelf” Super K plans and simplified testing services that accommodate these plan designs at a relatively low administrative cost.
Disclaimer. This article is intended only to give a brief overview of the Super K plan. Be sure to discuss the details, benefits and limitations of the “Super K” plan and whether it could work for your business, with your favorite employee benefits expert.
Cher E. Wynkoop is a partner in the Employee Benefits Group at Willcox & Savage P.C. and she can be reached at firstname.lastname@example.org or (757) 628-5581.