Ted's Table

Technical Terms Individual retirement account (IRA) Matching contribution Profit-sharing plan Required minimum distribution (RMD)

TB: When your IRS Form 1099 is issued at the end of the year for your distributions, that form will break it down.

Your employer or the organization it hired to run the plan is required to maintain records of these different types of contributions. While you may not be able to transfer the after-tax contributions to an IRA, the investment income can be rolled over. The entity that makes the distribution is required to prepare and file a 1099 tax form for the taxable portion.

By the way, no portion of a required minimum distribution is eligible to be rolled over into an IRA.

TB: The fact that you have another plan doesn't preclude you from starting a 401(k) plan but it will impact its design.

I'm going to try to read between the lines a bit with your question. I'm assuming that the reason you were told you couldn't have a 401(k) plan is because more than 60 percent of the assets in the profit-sharing plan belong to either you or your wife. There is a section of the Internal Revenue Code known as the "top-heavy" rule, which is commonly confused with the special nondiscrimination tests that apply to 401(k)s. A plan is top-heavy whenever more than 60 percent of the assets in the plan belong to the owners and other key employees. I'm assuming that the plan you now have is top-heavy.

I'm also assuming from your question that you aren't enthused about paying a matching contribution — you don't want to do a plan where you must contribute an employer match. You were told that in your situation, you couldn't do that. You got good information.

But, the person who said you couldn't have a 401(k) plan at all is wrong. Your top-heavy profit-sharing plan will likely preclude you from establishing a 401(k) without an employer contribution. In all likelihood, you will need to make an employer-matching contribution to deal with the top-heavy issue.

Here's a way to make it work. If you establish a 401(k), you, as the employer, must contribute for all eligible employees a minimum contribution equal to 3 percent of pay unless each of you contribute less than this amount. For example, assume your eligible employees earn $100,000, and your wife and you contribute 5 percent of pay to a 401(k). The employer must contribute $3,000 for the eligible employees regardless of whether or not they contribute.

Another solution is to set up a safe-harbor 401(k) plan. In this plan, you must make a fully vested 3 percent of salary contribution to all eligible employees regardless of whether they contribute. This type of plan will solve any top-heavy issues and any highly compensated employee issues, if you also have them.

Related Reading 401(k) Substitutes for Small Business Owners Ted's Table: Top-heavy Rules Ted's Table: 401(k) Plan Designs That Comply with Top-heavy Rules

Another alternative to consider is a SIMPLE-IRA. This plan will also require you to make an employer contribution but is much less expensive to operate. You can set it up by working directly with a good fund company, and you don't have to pay any fees to establish or maintain the plan. You will have to contribute 1 percent of pay for those eligible employees who contribute during the first two years and at least 2 percent after the first two years. However, the fees you save will probably fund the employer contribution.

If the profit-sharing plan's assets aren't concentrated with you and your wife, you have more latitude.

Get back to me if you need more help.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Ted's Table

Technical Terms Individual retirement account (IRA) Matching contribution Profit-sharing plan Required minimum distribution (RMD)

TB: When your IRS Form 1099 is issued at the end of the year for your distributions, that form will break it down.

Your employer or the organization it hired to run the plan is required to maintain records of these different types of contributions. While you may not be able to transfer the after-tax contributions to an IRA, the investment income can be rolled over. The entity that makes the distribution is required to prepare and file a 1099 tax form for the taxable portion.

By the way, no portion of a required minimum distribution is eligible to be rolled over into an IRA.

TB: The fact that you have another plan doesn't preclude you from starting a 401(k) plan but it will impact its design.

I'm going to try to read between the lines a bit with your question. I'm assuming that the reason you were told you couldn't have a 401(k) plan is because more than 60 percent of the assets in the profit-sharing plan belong to either you or your wife. There is a section of the Internal Revenue Code known as the "top-heavy" rule, which is commonly confused with the special nondiscrimination tests that apply to 401(k)s. A plan is top-heavy whenever more than 60 percent of the assets in the plan belong to the owners and other key employees. I'm assuming that the plan you now have is top-heavy.

I'm also assuming from your question that you aren't enthused about paying a matching contribution — you don't want to do a plan where you must contribute an employer match. You were told that in your situation, you couldn't do that. You got good information.

But, the person who said you couldn't have a 401(k) plan at all is wrong. Your top-heavy profit-sharing plan will likely preclude you from establishing a 401(k) without an employer contribution. In all likelihood, you will need to make an employer-matching contribution to deal with the top-heavy issue.

Here's a way to make it work. If you establish a 401(k), you, as the employer, must contribute for all eligible employees a minimum contribution equal to 3 percent of pay unless each of you contribute less than this amount. For example, assume your eligible employees earn $100,000, and your wife and you contribute 5 percent of pay to a 401(k). The employer must contribute $3,000 for the eligible employees regardless of whether or not they contribute.

Another solution is to set up a safe-harbor 401(k) plan. In this plan, you must make a fully vested 3 percent of salary contribution to all eligible employees regardless of whether they contribute. This type of plan will solve any top-heavy issues and any highly compensated employee issues, if you also have them.

Related Reading 401(k) Substitutes for Small Business Owners Ted's Table: Top-heavy Rules Ted's Table: 401(k) Plan Designs That Comply with Top-heavy Rules

Another alternative to consider is a SIMPLE-IRA. This plan will also require you to make an employer contribution but is much less expensive to operate. You can set it up by working directly with a good fund company, and you don't have to pay any fees to establish or maintain the plan. You will have to contribute 1 percent of pay for those eligible employees who contribute during the first two years and at least 2 percent after the first two years. However, the fees you save will probably fund the employer contribution.

If the profit-sharing plan's assets aren't concentrated with you and your wife, you have more latitude.

Get back to me if you need more help.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.