Mini(k)Plan Case Studies

Case Study Profile

Business Type:

Mortgage Broker

Business Entity:

Subchapter "C" Corporation

Owner's Income:

$150,000 earned income reportable on W-2 prior to bonus

Owner's Age:

55

Marital Status:

Single

Employees:

None

Plan Objective:

Maximize tax deductible contribution to provide maximum retirement benefit

Comments:

This individual has a $450,000 profit at year-end. He must take a bonus and pay taxes at his individual rate (35%), retain the income in his corporation and pay taxes at the corporate level or establish a plan to shelter some or perhaps all of the additional taxable income.

$284,700 more than the SEP or Keogh in 2010!

The Mini(k) is a Profit Sharing Plan with a 401(k) feature which can be combined with a Defined Benefit Pension Plan (DB). As shown above, the combined Defined Benefit and Mini(k) Plans provides the mortgage broker with a higher deductible contribution than the SEP or a so-called Keogh plan.

Learn more about increased savings provided by Roth 401(k).

What's the catch? Just one, in reality the Mini(k)Plan is a Profit Sharing Plan with a 401(k) feature. This means that the Mini(k) is a qualified retirement plan subject to numerous government compliance requirements. If you don't comply with these requirements, you can lose the benefits gained by choosing this plan type over a SEP or a SIMPLE. Here's a chart that illustrates just some of the compliance requirements and features for these different plan types.

Compliance Requirements and Plan Features	SEP	SIMPLE	Mini(k)Plan
Formal Plan Document	No	No	Yes
Trust Reconciliation	No	No, for SIMPLE IRA Yes, for SIMPLE 401(k)	Yes
Annual Filing	No	No, for SIMPLE IRA Yes, for SIMPLE 401(k)	Yes^*
Rollovers from other Plans and IRAs	Yes	Another SIMPLE only	Yes
Loans Permitted	No	No	Yes
Advantage to add Spouse	No	Yes	Yes
Updates Required by Law	No	No	Yes
Establish New Plan By	Due date of return or any extension	October 1 unless new employer	December 31
Must fund Employee Contribution by	Not Applicable	Corporation: Earliest date employer can transmit contributions. Sole Prop/Partner: by due date or extension.	Corporation: Earliest date employer can transmit contributions. Sole Prop/Partner: by due date or extension.
Must fund Employer Contribution by	Due date of return or any extension	Corporation: by due date of return or extension. Sole Prop/Partner: by due date or extension.	Corporation: by due date of return or extension. Sole Prop/Partner: by due date or extension
*Recommended but not required until assets exceed $250,000 This chart illustrates basic requirements only. All plans shown may be selected for audit by the government; all require timely and accurate completion of forms and other related documents when established and ongoing. Chart is intended as a resource only; consult a professional before implementing any plan.

View comprehensive chart for these plan types: "Compliance Requirements and Limits"

View comprehensive chart for these plan types: "Available Benefits and Features"

Closing Comments

A SEP or SIMPLE plan is traditionally the appropriate plan type for an independent contractor (self-employed individual). These plan types do not require formal plan documents or governmental reporting and disclosure and the additional cost for professional services typically associated with these requirements. Both the Min(k) (Profit Sharing Plan with a 401(k) feature) and the Defined Benefit Pension Plans are qualified retirement plans requiring formal plan documents and governmental reporting and disclosure.

The maximum deductible contribution to a SEP is the lesser of 25% of compensation (earned income) or $49,000. As shown in the chart above, this means that the mortgage broker with at least $196,000 of W-2 earned income can contribute the law's maximum deductible contribution to either the SEP or the Mini(k), however...

The combined Mini(k) and Defined Benefit Pension Plan provides the 55 year old mortgage broker with a $284,700 higher deductible plan contribution and a significant increase in benefits at retirement.

Bottom Line: In the example above, if the mortgage broker desires a deductible plan contribution of $49,000 or less, the SEP is the preferred plan since it does not require formal plan documents, and governmental reporting and disclosure. Be mindful that the SEP typically requires the inclusion of part-time employees (if they earned $550 or more in any 3 out of the prior 5 years) and, unlike the Mini(k), it does not permit the additional "catch-up" contribution for individuals age 50 or older ($5,500 in 2010). Lastly, the SEP does not facilitate the inclusion of a spouse working for the business to as great an extent as the qualified retirement plans.

Bottom Line: If the mortgage broker desires the maximum deductible contribution permitted by law, the combined Mini(k) and Defined Benefit Pension Plans are the preferred plans. The associated cost to establish and maintain the combined Mini(k) and Defined Benefit Pension Plans is justified based on the additional tax savings and the dramatic increase in benefits at retirement.

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We intend the information provided as a general resource, not as formal investment or retirement planning advice or counsel. If you consider any actions discussed in this analysis, we suggest that you consult a qualified planning professional. ERISA Expertise LLC does not warrant and is not responsible for any errors and omissions from this information. Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.