Case Study Profile

Business Type:

Wholesale Electronic Parts Distributor

Business Entity:  

Subchapter "S" Corporation

Owner's Income: 

$130,000 W-2 earned income

Owner's Age:

50; Spouse is age 50

Marital Status:  

Married

Employees:   

None

Plan Objective:  

Maximize tax deductible contribution to provide maximum retirement benefit

Comments:

Total corporate profit before officer salary is in excess of $200,000. The shareholder/employee wants to maximize the plan contribution and minimize “earned income” reportable on W-2.  Pay spouse $24,000 as an employee for services to business; spouse contributes and deducts $22,000. Learn more about adding a spouse to your plan 

$40,000 more than the SEP or "Keogh" in 2011!

 Owner needs $196,000 of W-2 income for $49,000

contribution to SEP or Keogh - $1,914 additional FICA tax!

The Mini(k) permits $40,000 more than the SEP or so-called "Keogh" Plan thereby saving the shareholder/employee an additional $14,000 in taxes (assumes 35% tax bracket).  In addition, the shareholder/employee saves $1,914 in FICA tax ($1,579 in 35% bracket) since the owner can contribute the $54,500 maximum with a lower W-2 earned income ($130,000 versus $196,000) in comparison to the SEP or Keogh.  The balance of the corporate profit is distributed as unearned income not subject to FICA tax.  But that's not all, look at the difference in benefits you gain by selecting the Mini(k) over a conventional plan.  

The Mini(k) provides $2,489,065 at age 65;

$1,418,430 more than the SIMPLE and

$1,313,434 more than the SEP or Keogh!

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

However, be sure to consider the following factors before adding your spouse to your plan:

  • Justification and extent of compensation for services rendered

  • Business income available for payment of services rendered

  • The extent of the plan contribution based on payment for services rendered

  • The cost attributable to FICA taxes (Social Security and Medicare) by both the business and the spouse (and the relatively small cost for FUTA or SUTA taxes) - see analysis below

Learn more about the factors to consider before adding your spouse

FICA Tax Analysis

Owner's W-2 income:

$130,000  

Spouse W-2 Compensation:

24,000

  

FICA paid by employee (7.65%):

1,836

  

FICA paid by employer (5.74% in 35% bracket):

1,193

  

Total FICA tax: 

3,029

  

FICA Tax Savings by adding spouse:

0

  

Net additional FICA Tax Cost:                    

3,029

*

Plan contribution (100% of compensation):

24,000

  

Tax Savings:

$8,400

  

*There is no net savings of FICA tax since the business owner would not pay any FICA tax if he received the $24,000 as unearned income via a subchapter S distribution.

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 a business owner with no  employees.  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. 

 

The Mini(k)Plan is a qualified retirement plan (Profit Sharing Plan with a 401(k) feature) requiring a formal plan document and governmental reporting and disclosure.  However, in addition to a higher tax-deductible contribution, the Mini(k) allows the shareholder employee to receive a lower W-2 income and contribute the law's maximum deductible contribution.  The higher plan contribution saves income tax and the lower W-2 income saves FICA tax.  Further, the Mini(k) permits your spouse to contribute 100% of compensation up to $22,000 in 2010.

 

Bottom Line: The associated cost to establish and maintain the Mini(k) is justified based on the additional taxes you save and the dramatic increase in benefits at retirement.

Back to previous page

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.