Thinking of Maximizing 401(k) Contributions for Key Employees? Read On to Find Some Expert Tips

July 5, 2018

Is your business thriving and humming along, and you want to maximize your 401(k) savings for your top performers? Are you wondering how to allocate contributions to retirement accounts? Here we have discussed several options that help you contribute more to your employee’s retirement account.

401(k) Contribution Limits

A contribution limit is set by the IRS in which it allows an employee or an employer to place into a qualified account. The maximum amount an employee or employer can together contribute or receive in their contribution plan each year is $55000. In a single year, an employee can contribute $18,500 to their 401(k), one of the best retirement plans for small business in a single year whereas an employer can add $36,500 to the same 401(k) account of the employee. But here are a few conditions to consider.

The total contribution limit, that is, $55000 should not be greater than the employee’s salary.
The company should raise the match percentage to contribute more to a single employee on his 401(k) plan.
The tax-deductible contributions for an employer are limited to 25% of the total eligible payroll.

Combined Contribution

The employer gets a lot of flexibility in reaching the maximum contribution level. Even though employees are responsible for funding their own 401(k) plan, the employer can match employee contributions up to a certain percentage. The employer has the right to decide whether or not to provide a company contribution.

Profit Sharing Contribution

Similar to the combined contribution, the employer has the right to choose whether or not to provide a profit sharing contribution. In this approach, there are different formulae that help you to allocate contributions differently.

The first approach is based on the compensation fund and the age of the employees. In this approach, the main focus is on consideration funds available at retirement rather than the amount an employee receives each year. By this way, an older employee can receive a larger profit sharing contribution in one year than a younger employee earning the same salary.
The next approach is the ‘new comparability’ allocation in which employers place employees in different categories for allocating contributions. A larger contribution can be directed to specific groups of employees according to the decision of the employer.

Defined Benefit Plans

Defined benefit plans can offer much large contribution limits, and can be particularly valuable for older employees who are nearing the retirement age. You can also opt for cash-balance plans to contribute more to the retirement account of your key employees.

Talk to your 401(k) plan administrator now to know more about the relation between 401(k) and profit sharing plans.