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The goal of many Employers is to maximize retirement benefits for owners and executives while controlling cost to non-owner employees.
BENEFIT EQUITY, INC. has pioneered an employee benefit program specifically intended to meet this objective with the plan design called PENMAX. The PENMAX design can be incorporated into any type of retirement plans such as Defined Benefit, 401(k), or Profit Sharing Plans.
Before explaining how PENMAX works, let's review the following:
There are two kinds of qualified retirement plans:
Defined Contribution Plan: A Defined Contribution (DC) plan is a type of retirement plan in which the amount of the employers' or employees' annual contribution is specified as a percent of salary (1% to 25%). Individual accounts are set up for participants and benefits are based on the contributions made plus any investment earnings. Common names of Defined Contribution plans are: 401(k), Profit Sharing, Money Purchase, and ESOP. Since benefits are based on the accumulation of contributions throughout the years the DC plan tends to favor the younger employees.
Defined Benefit Plan: A Defined Benefit (DB) plan is a type of retirement plan that specifies how much in benefits it will pay out to an employee at some future date or age. For example, the formula could be, "at retirement age you will receive $12,000 a month for as long as you will live" Once the benefit is determined the employer must make annual contributions to meet this obligation.
The concept here is to determine how much money must be contributed to the plan to have enough cash invested to make these payments. In the case of someone retiring at age 65 you will need approximately 1.5 million dollars. If you have ten years to retirement you would have to contribute $120,000 a year assuming you earn 5% on your investments. The DB plan favors the older employees because of the shorter time span to contribute that result in higher annual contributions.
How PenMax works.
The PENMAX program would take advantage of the benefits presented by both the DB and the DC plans as follows:
- A Define Benefit plan for the owners or the selected group of employees that the company intends to favor, and
- a Defined Contribution plan such as a Profit Sharing plan, and
- a 401(k) plan for all employees where all employees are allowed to defer part of their salary. No employer contribution will be made to this 401(k) plan.
Since the DB-type plan would favor a much older population, more contributions will be allocated to the DB plan, while the DC plan participants would receive at least a minimum contribution of 7.5% of their pay (minimum contribution as stipulated by the IRS). In addition, with the existence of a 401(k) plan, all participants are allowed to supplement their retirement benefits with their own deferrals.
Since the Defined Benefit Plan and the Profit Sharing Plan do not cover the same employees, the employer can deduct contributions made to each plan without being subject to the usual $41,000 or 25% of salary deductibility limit.
All DB plans must satisfy a minimum participation testing that calls for each DB plan to benefit at least the lesser of 50 employees or 40% of all employees of the employer Consequently, PENMAX would "offset" the impact of this requirement by creating within the DB plan various tiers of benefit formulas. The way we can accomplish this is because of the regulations provided by the Internal Revenue Service that allows us to test for discrimination based either on the contributions that the employer makes or on the retirement benefits these contributions can provide.
We follow the law
Our PenMax plan is based on regulations under Section 401(a) (4) of the Internal Revenue Code. These regulations set forth the rules for determining whether or not a retirement plan discriminates in favor of highly compensated employees. Though these rules are considered very complex and restrictive, they contain objective tests to determine whether or not a plan discriminates. We simply follow the government's rules.
Summary
The PENMAX retirement program benefits consistently profitable companies with large salary disparities between employees and owners. It's based upon the relative age, years of service, and compensation of your company's owners and employees.
You choose the group of employees that you need to favor such as:
Group A: owners and family members = maximum benefits
Group B: managers = somewhere between minimum and maximum benefits
Group C: all remaining employees = minimum benefits (generally 7.5% of pay)
Please talk to one of our consultants to see if the PenMax plan is right for you. |
