Creative Plan Designs

Creative Plan Design Ideas for 2019

Administrative Retirement Services, Inc.(ARS) believes that plan design is paramount to the success of a retirement plan. In order to properly design a retirement plan, the plan objective must be clearly defined. The most common plan objective we encounter and the one we are going to discuss first is to maximize benefits to the business owner while minimizing contributions to the other participants. This objective can be met by setting up a Cross-Tested Safe Harbor 401(k) Plan. A Cross-Tested Safe Harbor 401(k) Plan is a type of retirement plan which provides the most flexibility in how profit sharing contributions are allocated.

Cross-Tested Plans

Cross-testing is a plan design concept which allows a company to define classes of employees and contribute profit sharing contributions on a percentage basis to each class. Cross-testing works best in a company which has a business owner who is slightly older than the rest of the employees. Annually, the contribution formula must pass an average benefits test. In addition to the average benefits test, the plan must also satisfy a minimum allocation gateway where each non-highly compensated employee (NHCE) in the plan has an allocation rate that is at least one-third of the allocation rate of the highly compensated employee (HCE) with the highest allocation rate, or, each NHCE receives an allocation percentage of at least 5% of the NHCE's compensation.

In a typical cross-tested plan, HCEs receive a higher allocation rate, often 14% to 25% of compensation, while NHCEs, regardless of their age or years of service, receive comparatively lower allocation rates of 5% or less of compensation. For clients who want to utilize cross-testing and safe harbor but want to contribute the minimum amount and receive the maximum available, the owner would receive 9% of compensation and the other eligible employees would receive 3%, which passes the allocation gateway described above.

Safe Harbor 401(k) Plans

Safe Harbor is a concept which has been around since 1999 and allows plans to automatically pass nondiscrimination and top-heavy testing. A Safe Harbor 401(k) Plan requires that the plan sponsor contribute either 3% of compensation to all eligible participants, or match 100% of the first 3% plus 50% of the next 2% of employee compensation deferred. Both contributions are 100% vested immediately.

In order for a company to adopt safe harbor for a calendar year plan, the plan must be amended and notice must be given to the employees at least 30 days prior to the beginning of the plan year, or by December 1 for calendar year plans.

The maximum contribution a participant can receive in a 401(k) profit sharing plan for 2019 from all contribution sources such as 401(k), profit sharing, matching and safe harbor is $56,000, plus any catch-up contributions. See our Dollar Limits page for a complete listing of the 2019 annual plan limits.

In most plan design scenarios the company contribution is reduced if the business owners can contribute the maximum 401(k) amount. For 2019, participants can contribute $19,000 to a 401(k) plan. If the participant will attain the age of 50 during 2019, they can also contribute $6,000 as a catch-up contribution. One way to guarantee that the business owner will be able to contribute the maximum 401(k) amount without testing issues is to adopt either Safe Harbor contribution option.

If the business owner utilizes safe harbor and has a spouse on the payroll, the spouse can contribute 100% of their wages up to the annual limits to the plan.


In Option One we have demonstrated two business owners at different wage levels receiving the maximum 401(k) contribution amount of $19,000 plus $6,000 as a catch-up contribution by utilizing the Safe Harbor Non-Elective 3% contribution. The company is also contributing Profit Sharing contributions of 1.41% to the employees and 10.22% to the owners, which are subject to the plan's normal vesting schedule. Under this scenario the business owners receive 74% of the employer contributions.

Some business owners only want to make contributions for those employees who are contributing to their own retirement. The Safe Harbor Matching contribution of 100% of the first 3% plus 50% of the next 2% of employee contributions is a great option for them to use. In Option Two we have demonstrated all of the employees contributing 5% of compensation and receiving the Safe Harbor Match. Under this scenario, the business owners can again contribute up to the annual limit of $19,000 plus $6,000 as a catch-up contribution for 2019. The matching contributions for the employees are affordable and each business owner contributes the maximum amount allowed. The business owners receive 49% of the matching contributions.

An option to consider for a business with no employees other than the business owner and spouse is a Solo 401(k) Plan. For an owner only business which earns less than $224,000 per year, a 401(k) plan allows those individuals to contribute more than a traditional profit sharing or SEP. If the owner earned $100,000 for 2019 and was over 50 years old, under a traditional profit sharing plan the company contribution could be up to $25,000. If you added a 401(k) feature to the profit sharing plan, the individual can also contribute $19,000 plus the $6,000 catch-up contribution for 2019, for a total contribution of $50,000. Note that there can be no common law full-time employees in the company. Part-time employees who work less than 1,000 hours per year can be excluded from the plan.

For specific plan design ideas, contact Administrative Retirement Services, Inc.

    Option One   Option Two
    Cross-Tested Safe Harbor 401(k) Plan   Safe Harbor Match
          Safe       Safe
          Harbor       Harbor
Name Age Wages 401(k) PS 3% Total   401(k) Match
Owner 1 59 280,000 25,000 28,600 8,400 62,000   25,000 11,200
Owner 2 58 100,000 25,000 10,215 3,000 38,215   25,000 4,000
Total Owners   380,000 50,000 38,815 11,400 100,215   50,000 15,200
Employee 1 51 75,000 0 1,080 2,250 3,330   3,750 3,000
Employee 2 45 40,000 0 576 1,200 1,776   2,000 1,600
Employee 3 50 60,000 0 864 1,800 2,664   3,000 2,400
Employee 4 54 55,000 0 792 1,650 2,442   2,750 2,200
Employee 5 39 30,000 0 432 900 1,332   1,500 1,200
Employee 6 35 25,000 0 360 750 1,110   1,250 1,000
Employee 7 41 35,000 0 504 1,050 1,554   1,750 1,400
Employee 8 38 30,000 0 432 900 1,332   1,500 1,200
Employee 9 36 20,000 0 288 600 888   1,000 800
Employee 10 29 28,000 0 403 840 1,243   1,400 1,120
Total Employees 398,000 0 5,612 11,940 17,552   19,900 15,920
Total Contributions   50,000 44,427 23,340 117,767   69,900 31,120
Percent to Owners   100% 87% 49% 85%   72% 49%
Percentage to Employees   0% 13% 51% 15%   28% 51%
Percentage of Profit Sharing & Safe Harbor to Owners   74%      
Total Profit Sharing & Safe Harbor       67,767      
Total Profit Sharing & Safe Harbor to Owners     50,215