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A business owner's guide to maximizing retirement savings: Guest view

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Anthony M. Conte, managing partner at Conte Wealth Advisors
Anthony M. Conte, managing partner at Conte Wealth Advisors - (Photo / )

As a business owner, you toil in service of your company's success.

But let’s not forget that you need to look after you as well. Your company retirement plan can and should help you out here.

This is the first of three monthly columns addressing how business owners might get the most from their company-sponsored retirement plans.

Discrimination

Building your company’s 401(k) plan is fraught with risks, but one of the most unsettling and unexpected risks may impact your own and your best employees’ retirement plan savings.

No one likes to receive a return of pretax savings upon failure of your plan’s discrimination testing, but that is exactly the federally taxable event that impacts many owners and top executives participating in some 401(k)s.

How it works

Let’s play this out in real-life.

Dan is your best salesperson and heads up your firm’s sales team.

Dan likes to fish on his days off and he likes to eat that fish for lunch after heating it up in the break-room microwave.

Ryan likes Dan for his personality but he hates him for his proclivity for reheated seafood. Ryan has lost 15 pounds since moving to Dan’s sales team, he attributes this to his promotion to an office closer to the breakroom. I mean, the stink of Dan’s food alone.

Helen, on the other hand, likes neither Ryan nor Dan. She quietly resents Ryan for his recent weight loss as she’s been trying unsuccessfully to shed a few pounds on her own. At the same time, Helen feels entitled, after years on the sales team, to Dan’s position. Given the fact that you as the business owner are her father, she feels that she has to work harder to overcome your fear that promoting her could be seen as nepotistic.

Dan’s annual income was $150,000 last year, while Ryan earned $95,000, and Helen earned $90,000.

All three have contributed $18,500 to their respective pretax 401(k) plans (the maximum allowable for participants under age 50 in 2018), but at the end of the year Dan and Helen each receive a check for around $10,000 from the plan (for reasons discussed below). This check reduces each of their savings into the plan and costs them considerable and unexpected federal tax consequence.

Ryan gets to keep all of his 401(k) savings in the plan and he gets the full tax benefit for having done so.

He also starts complaining to you about Dan’s reheated seafood lunches, but that has nothing to do with the 401(k) plan. He’s just sick of losing his appetite around lunch.

The factors at play

Dan and Helen are both considered “highly compensated employees” or HCEs, a distinction created in an attempt to make 401(k) plans fair for all participants. This is why Ryan kept his savings in the plan and Dan and Helen couldn’t.

Two tests are imposed to gauge whether or not an employee is an HCE: the compensation test and the ownership test.

The compensation test qualifies as HCEs employees who earned over $120,000 for the 12-month period immediately preceding the plan year, and the ownership test qualifies as HCEs any 5 percent owner at any time during the plan year or during the 12-month period immediately preceding the plan year.

Given Dan’s income he fails the plan’s discrimination testing by failing the compensation test, resulting in the return of some of his plan savings.

Helen isn’t an owner, but her father is. To Helen’s chagrin, any individual who is a spouse, child, grandparent or parent of someone who is a 5 percent owner is treated as a 5 percent owner.

Helen unhappily receives her surprise return of contributions into the plan and now has one more reason to dislike Ryan.

Retirement plans, as you can see, are incredibly complex employee benefits and require the steady hand of a team of professionals who specialize in the creation, implementation and maintenance of such plans.

Next up: advice on how to avoid these kinds of surprises.

Anthony M. Conte is managing partner at Conte Wealth Advisors based in Camp Hill. He can be reached at tconte@contewealth.com.

Registered Representative Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Cambridge and Conte Wealth Advisors LLC are not affiliated.

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trishala rawat September 7, 2018 4:55 am

The guidelines to maximizing retirement savings really seems effective. Retirement plans, as you can see, are incredibly complex employee benefits and require the steady hand of a team of professionals who specialize in the creation, implementation and maintenance of such plans.
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