Whose Company is it Anyway? - The Benefits of Creative Plan Design

As a business owner or shareholder, does this question ever run through your head when you are forced to comply with the myriad of regulations related to providing employee benefits to your employees.  No successful business owner will deny the importance of loyal, trustworthy and competent employees as a significant component of a company’s success. Although every employee is important to the business (or they wouldn’t still be employed), there is no argument that some are deemed more important than others. Importance to the business is not always measured by the salary that is required to retain and reward these employees.

The problem with rewarding specific individuals or groups of employees is the never ending government mandates and regulations requiring “equal” treatment and nondiscrimination. This has been increasingly prevalent in the 401(k) retirement plan system. Many employers accept standard retirement plan provisions that have been forced upon them by their retirement plan financial advisers and providers and assume that there is not much choice in how the plan is constructed. The reason they have not been offered better solutions is generally twofold: 1) their financial adviser is not a retirement plan specialist and does not have the knowledge of the rules and regulations, or 2) their service provider offers a simplified, scalable solution to keep administrative costs down and margins up.

Although there are numerous regulations that discourage and prohibit discriminatory practices in favor of the highly paid, there are techniques available to treat certain employees differently. Some of these lesser known realities are as follows:

  • You can discriminate against Highly Compensated Employees (HCE) to any degree. An HCE is one earning $115,000 or more annually.
    • Assume you have a group of young, high paid salespeople that would rather have cash in their pocket. You can exclude them from the plan or not bother to match their contributions.
       
  • A safe Harbor plan is not the only way to pass the average deferral percentage test. Companies have come to believe that matching contributions at the 4% level for all employees with full and immediate vesting is the only way to allow HCE to contribute more to the plan.
    • Automatic enrollment will normally increase participation enough to satisfy contribution tests. Matching contributions can be adjusted based on participation level. Forcing more to contribute will improve overall participant retirement success.
       
  • You can discriminate in favor of non-highly compensated employees to any degree.
    • Provide those underpaid and overworked, longtime employees with an extra contribution. Remember, an extra 3-5% employer contribution to a retirement plan is not subject to the extra 15% combined FICA tax.
       
    • Shift asset based plan expenses from the plan, to the company and reduce employer match or other contributions to compensate.
      • Administrative and investment fees are generally allocated to plan participants based on the size of their account. Why should the longer tenured employee with $100,000 in their account pay 100 times more than the new employee with $1,000 in their account? Shifting expenses in this way will also prevent the inevitable complaints that will arise shortly when fee disclosure to employees takes effect on August 30, 2012.

These are just a few Plan Design techniques that can be used to make the retirement plan a useful tool to retain and reward employees based on the company’s objectives rather than treating the plan as another “ho-hum” expense that cannot be avoided. In order to implement these techniques, the Plan Document will need to be amended and must clearly state the benefit eligibility criteria that you have established.