Is a "Class-based" Retirement Plan
Right for your Business?
Are you a small business owner who generally is older and more highly compensated than your employees? Do you want to maximize your share of company retirement plan contributions? Current laws permit you to set up a Profit Sharing plan that allows discretionary company contributions, which means that in leaner years you are not obligated to fund your retirement plan.

Class-bassed Plan
Class-based plans tend to favor older, more highly compensated employees (in most cases, the business owners). In class-based plans, employees are divided into groups based on plan sponsor funding objectives. Because benefits are tested as of normal retirement age, plan sponsors can provide different benefits to different groups. Typically, one group will contain owner employees (who receive a larger benefit) and the other group contains non-owner employees (who receive a smaller benefit). Although the contribution rates are not the same, these plans are designed to pass IRS general non-discrimination rules.

Example
If you look at the following chart you╠ll see that each plan design scenario shows the same total owner contribution. By using alternative plan designs, the plan sponsor is able to maintain the owner╠s contribution and reduce the cost to fund the plan.
Hypothetical Profit Sharing Design Scenarios
Participant
Age
Pay
Pro Rata
Allocation %
Integrated
Allocation %
Class-based Allocation %
Owner
55
250,000
50,000     20%
50,000     20%
50,000     20%
Employee 1
20
30,000
6,000       20%
5,023       17%
1,500       5%
Employee 2
55
30,000
6,000       20%
5,023       17%
1,500       5%
Employee 3
40
30,000
6,000       20%
5,023       17%
1,500       5%
Employee 4
30
30,000
6,000       20%
5,023       17%
1,500       5%
Total
74,000
70,092
56,000
% to Owner
      67%   71%   89%

401(k) Plans
A 401(k) feature can be added to this arrangement to permit employees to make additional deductible contributions to the plan.

By adding a 401(k) feature it increases the maximum contribution amount to $55,500 for owners who are at least age 50, because they are allowed to contribute a $5,500 ¤catch-upË contribution

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