401(K)

Limits on contributions and deferrals

1. The maximum annual tax-deductible contribution for the employer to a 401(k) plan is 100% of participants' compensation. Up to $15,500 (2007 Limit).
2. The maximum annual allocation to an individual participant is the lesser of 100% of compensation or $45,000.
3. Age 50 catch-up contribution is $5,000 (2006 Limit).
4. Minimum contribution to top-heavy plan is 3% of pay for all participants who are not key employees or at least as high a percentage as key employees receive.
5. Additional contributions can be made in the form of profit sharing contributions on a discretionary basis.

The Safe Harbor plan design can satisfy non-discrimination testing for ADP and ACP, meet your top-heavy minimum required contributions and even enhance your leverage for Profit Sharing Contributions.

By contributing 3% of compensation to all eligible employees regardless of their deferrals, the Company can:

• Satisfy Non-Discrimination Testing for Deferrals (ADP) allowing Highly Compensated Employees the ability to defer $15,500 pre-tax.
• Satisfy Top Heavy Minimum Contributions (required 3% contribution when Highly Compensated Employees own more than 60% of the assets).

These contributions must be made for anyone employed during the year who meets eligibility, and must be 100% vested.

This contribution may also be used to meet the minimums for New Comparability and Tiered Allocation Profit Sharing Contributions.

If the plan is not Top-Heavy and the Company is going to make Matching Contributions, another alternative is to make a Safe Harbor Match.

The Company can meet both the Deferral and Matching Non-Discrimination Tests by contributing 100% of the first 3% that employees defer and 50% of the next 2% of deferral. This could result in a match of 4% of compensation if all employees contribute 5%.

Again, the contributions must be 100% vested and made for anyone who defers during the year.

• 1. Key employee - means an employee who, at any time during the plan year or any of the 4 preceding plan years, is
  • an officer whose compensation is $145,000 or more
  • a 1% owner whose annual compensation exceeds $150,000
  • one of the 10 largest owners of the employer having annual compensation in excess of the annual addition limitation ($45,000 for 2007)

• 2. Highly Compensated Employees - (HCE)
  • Received compensation from the employer of more than $100,000 (indexed for 2007) in the preceding year.

• 3. Non-Highly Compensated Employees - (NHCE)
  • are not highly compensated employee.

• 4. A Top-heavy plan is
  • a plan that unduly favors key employees by providing 60 percent or more of the benefits or account balances to these employees. These plans are subject to additional restrictions.

A 401(k) plan must be reviewed at leased annually to be sure that the highly compensated employees are not deferring a substantially greater percentage of their compensation than the non-highly compensated employees.

The ADP test checks the amount deferred, on average, by each group. The average deferral percentage, or ADP, of the group of highly compensated employees can not exceed on average more than 2% more than the ADP of the non-highly compensated employees.

An additional test, similar to the ADP test and called the average contribution percentage or ACP test, must also be satisfied if there are employer matching or employee after-tax contributions, and may further limit contributions for the highly compensated employees.

Because it is critical that a 401(k) plan meet these and other nondiscrimination requirements, and because the calculations can be quite complex, it is important that your 401(k) plans be supported by skilled administration specialists.

Employees who are age 21 or older and have completed one year of service with the employer must be eligible to participate.

Individual participants can defer as much as $10,500 (indexed for 2007) per year.

Participant's deferrals and employer matching or nonelective contributions are 100% vested.

The deferrals of highly compensated employees are not limited by the deferrals of the non-highly compensated group.

The maximum annual tax-deductible contribution, including employee elective deferrals, is 15% of the pay of all participants.

The employer must either match employee's deferrals dollar for dollar up to 3% of pay, or contribute 2% of pay for all eligible.

The maximum salary deferral for 2007 is $10,500. If you are 50 years old you can have a "catch-up" of an additional $2,500.

Not subject to annual ADP testing or top-heavy requirements.

May provide for participant loans and hardship withdrawals.

An employer may not operate any other qualified plan which benefits any employee eligible to participate in the SIMPLE 401(k) plan.