Individual
Compensation
Employer Contribution (includes 3% Safe Harbor)*
Employee Salary Reduction Contributions
Total Contribution
Partner 1 (Age 66)
$265,000
$35,000
$24,000
$59,000
Partner 2 (Age 52)
$265,000
$35,000
$24,000
$59,000
Associate (Age 35)
$160,000
$7,040
$0
$7,040
Assistant (Age 58)
$53,000
$2,332
$3,600
$5,932
Assistant (Age 42)
$37,000
$1,628
$2,200
$3,828
Totals:
$81,000
$53,800
$134,800
Total Cost for Nonpartners
$11,000
$0
* Safe Harbor 401(k) Plan using the 3% contribution safe harbor method and a cross-tested employer profit sharing contribution.
This example shows that Law Firm B’s two partners can each receive the maximum permitted total contribution of $59,000 for the year (combination of $118,000 for the partners), with a total firm contribution cost for the associate and two assistants of only $11,000. This means that approximately 88% of the total employer contribution cost for the plan will benefit the partners. If Law Firm B uses a productivitybased compensation method for the associate that charges the cost of the associate’s plan contribution against his or her pay, the total firm plan contribution cost would only be $3,960 for the two assistants. In addition, the plan offers the nonpartners the opportunity to reduce their pay on a pre-tax basis and contribute to their own retirement savings. In this example, both assistants have made salary reduction contributions. Example 3: Law Firm B (same census) If the partners in Law Firm B do not wish to make maximum contributions, they can still achieve significant retirement savings. The illustration below shows the contributions if the plan uses the 401(k) safe harbor contribution formula of 3% of compensation for all participants (discussed in the next section) but without any additional employer profit sharing contribution. Individual
Compensation
Employer Contribution (includes 3% Safe Harbor)*
Employee Salary Reduction Contributions
Total Contribution
Partner 1 (Age 66)
$265,000
$7,950
$24,000
$31,950
Partner 2 (Age 52)
$265,000
$7,950
$24,000
$31,950
Associate (Age 35)
$160,000
$4,800
$0
$4,800
Assistant (Age 58)
$53,000
$1,590
$3,600
$5,190
Assistant (Age 42)
$37,000
$1,110
$2,200
$3,310
Totals:
$23,400
$53,800
$77,200
Total Cost for Nonpartners
$7,500
$0
* Safe Harbor 401(k) Plan using the 3% contribution safe harbor method and no other employer contributions.
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In this example, the two partners can each make the maximum permitted salary reduction contribution of $24,000 for the year, and each will also receive a 3% employer contribution of $7,950, for a total contribution of $31,950 for each. The firm’s total staff contribution cost is only $7,500, or only $2,700 not counting the associate. Example 4: Law Firm B (with variation in salary deferral amounts) The 3% contribution safe harbor method is more efficient for Law Firm B than the matching safe harbor method (discussed in the next section) because the firm’s assistants participate in the salary deferral option. This is frequently not the case. Following is an illustration of the possible contributions for Law Firm B using the matching contribution safe harbor method, and assuming lower staff salary reduction contributions. Individual
Compensation
Employer Matching Contribution*
Employee Salary Reduction Contributions
Total Contribution
Partner 1 (Age 66)
$265,000
$10,600
$24,000
$34,600
Partner 2 (Age 52)
$265,000
$10,600
$24,000
$34,600
Associate (Age 35)
$160,000
$0
$0
$0
Assistant (Age 58)
$53,000
$2,120
$3,600
$5,720
Assistant (Age 42)
$37,000
$0
$0
$0
Totals:
$23,320
$51,600
$74,920
Total Cost for Nonpartners
$2,120
$0
* Safe Harbor 401(k) Plan using only a matching contribution of 100% of salary deferrals up to 4% of compensation.
In this example, the partners of Law Firm B again make maximum salary reduction contributions of $24,000 each, plus each receives a 4% matching safe harbor contribution of $10,600, for a total contribution of $34,600 for each. The only staff cost is a $2,120 matching contribution for Assistant 1. These illustrations of possible plan contributions show how a plan can be structured to best accomplish attorneys’ retirement objectives within the context of the firm’s situation. But, even though a retirement plan can offer a flexible means for an attorney to save for retirement with affordable costs for staff contributions, what about all the rules that apply to 401(k) plans and the cost involved to maintain and administer such a plan? Won’t these expenses offset the savings? What Rules Must the Firm Follow? It is true that many rules apply to qualified retirement plans. However, as shown above, these rules are flexible and permit law firms to customize a plan to suit the attorneys’ goals. The Internal Revenue Code sets annual limits on the amount that an individual can contribute to a 401(k) plan by way of salary reduction. For 2015, the maximum salary reduction contribution is $18,000. Individuals who are age 50 by the end of the year can con-