The Beneco Plan Can Help Avoid Corrective Distributions

The traditional 401(k) plan is a great tax-deferred retirement vehicle employers can offer as a valuable benefit for their employees. In order to meet compliance regulations, every 401(k) plan must pass an annual nondiscrimination test. Here’s how the test works:

– Employees are categorized in two (2) groups; highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). A highly-compensated employee is someone who made compensation of at least $120,000 during the previous plan year, someone owns at least 5% of the business or is a relative of someone who owns at least 5% of the business. Non-highly compensated employees are all other employees.

– Regulations state that the average deferral percentage of the HCE group must not be 2% greater than the NHCE group. If the average deferral percentage for the HCE group is 2% greater than the NHCE group, the plan is deemed to fail the test.

Should the plan not pass the test, the employer is faced with a difficult decision: either refund 401(k) elective deferrals back to their highly compensated employees, which are known as corrective distributions OR fund a “safe harbor” contribution to each employee participating in the plan, which is usually 3% of each employee’s salary. Corrective distributions can be administratively difficult, as well as confusing and frustrating for HCEs (who are generally upper management and executives).

If you’re a contractor working prevailing wage jobs with a traditional 401(k) plan, fringe benefit dollars can be used to help pass nondiscrimination testing! Beneco offers a bona fide trust plan that allows you (as the employer) to contribute employee fringe benefit dollars as retirement contributions to a bona fide trust, similar to a 401(k) plan. This is instead of paying the fringe benefit as cash, which is subject to income tax to the employee and payroll taxes to the employer.

All fringe contributions to the plan are tax-deferred. Income tax is deferred for employees and all payroll taxes are PERMANENTLY eliminated for the employer on every fringe dollar contributed. In addition to labor burden being eliminated, the fringe contributions can be used as employer contributions to help pass nondiscrimination testing. Not only do fringe contributions help avoid corrective distributions, but also saves your business approximately 8-10% on labor costs!

Contact us today to see how the Beneco Plan can help your business! We want to partner with you to help your business grow and help your employees plan for a secure retirement! For more information, call us at 1-800-965-2702 or email us at sales@beneco.com.