If having one retirement plan is good, having two can be even better. "The hot trend now is combining Safe Harbor 401(k)s and cross-tested profit-sharing plans," says Fred Harrison, president of Professional Pension Planners in Ardsley, N.Y. Together the plans give business owners a shot at saving more while spending less.
Say an entrepreneur who earns $200,000 wants to save $40,000, or 20% of her compensation. In a traditional profit-sharing plan, her company would be required to put 20% of each employee's compensation into their accounts as well. But if the company also has a Safe Harbor 401(k), those contributions could be much less. The business owner would first put the maximum $15,000 into the 401(k). She would then put $25,000 -- or 12.5% of her salary -- into the profit-sharing plan to meet her $40,000 savings goal. She would then use 12.5%, not 20%, as the starting point to figure out what share of profits needs to go into employee accounts.
Catherine A. Ha, a practicing dentist and founder of Carolina Dental Associates in Durham, N.C., needed a plan to help her company hang on to good employees. "Turnover is turmoil in a company like ours," says Ha. "If one of our hygienists quits, there goes our cash flow for the month."
Ha set up a SIMPLE IRA for her employees in 2002. This past March she upgraded to a combination Safe Harbor 401(k) New Comparability Profit Sharing Plan. Ha makes across-the-board contributions of 3% of compensation to the accounts of all eligible employees. That match for her 15 employees will cost Carolina Dental about $22,000. But Ha has no complaints, because she gets to stash the 2005 maximum of $42,000 into her own account -- far more than the $10,000 allowed this year in SIMPLE IRAs. Carolina Dental will also deduct the matches and administrative costs from its taxes. Ha estimates her total tax savings, compared with her old plan, at $7,000 to $10,000 a year. In all, says Ha, "it's an excellent benefit for the employees and for myself."