Savings Plans For Staff

October 4, 2003

Revised:  December 20, 2006

Last Revised:  May 23, 2012 4:50 PM

 

 

For the entire history of Vibrant Life we have NEVER had any pension plan or medical benefits.  That is now changing -- with the implementation of the incentive pay system described HERE.

The central core of this new savings opportunity is that all costs for this plan will be taken out of the "salary sum" which is used to make all payments to staff. 

Further, the plan starts with a standard 401k plan which is very popular in much of the nation, and has standard law and administration to support it.  Next, the plan will, like all 401k plans, allow for voluntary membership by each staff member.  For any staff member who activates the approved Vibrant Life 401k plan, the Company will make a contribution.  All money paid into this 401k savings plan carries a deferment of taxes as well as a penalty for early withdrawal.

A copy of the full law governing the 401k plan is HERE.  The top of that same page (here) shows other articles that explain the workings of a 401k plan.

This plan will be offered only to people who also take part, in even an agreed partial way, the Company Incentive Plan -- described here.

Some part of that salary sum will be used to pay whatever fixed (non-incentive) wages that exist; some portion of that salary sum will be used to pay the various taxes and fees related to employment (both the employee and the employer portions); some part of that salary sum will be used to make Company contributions to the individual 401k plans where the person qualifies for a Company contribution.

The first thing to know about a 401k plan is that is really "free money." 

You can contribute up to $15,500 per year into your own 401k plan.  That much is allowed for 2007, and the amount increases for 2008.  This maximum is allowed whether the Company makes any contribution or not, although the plan used by the Company can have certain restrictions allowed by law. 

One of the reasons why employers like these 401k plans is that they usually include a restriction that the money contributed by the employer, into YOUR 401k plan, is not yours in any way until you have remained with the company for some certain number of years.  This plan gives employers a legal way of giving you an incentive to remain an employee for at least a certain number of years.

This money is deducted from your regular pay-check -- in our case it would be deducted by the payroll company.  Vibrant Life does NOT process payroll checks and does not handle the withholdings and payments of your taxes to the government. 

Tax laws have changed to make the 401K even more attractive:

How you might benefit from a solo 401(k)

Eligibility. While a small business owner could establish a 401(k) plan under prior law, the administrative hassles might have discouraged you from doing so. Recent legislation makes establishing a 401(k) plan much more attractive for small business owners. Now, a business entity whose only eligible participants are business owners, partners, and/or spouses of owners or partners may establish a 401(k) plan easier and with greater deductions than ever before. Children, parents, and grandparents may also participate as long as they earn income from the business. (However, specific plan administrators may have their own guidelines or limitations regarding participants.) Nearly all forms of business entities and ownership are eligible for a Solo 401(k). Sole proprietors, partnerships, corporations (including S-corporations), LLC's, and LLPs may all establish Solo 401(k) plans.

The good news: As long as the eligible 401(k) participants are limited to those mentioned above ("eligible solo participants"), the solo 401(k) will not be subject to all the administrative, record-keeping, and investment monitoring regulations that traditional 401(k) plans must follow. Full-time employees who are at least age 21 and have one year of service must be offered the opportunity to participate in any 401(k) plan. However, for these purposes, a part-time employee working less than 1,000 hours per year can be disregarded and will not affect the solo 401(k)'s legal compliance. It may be a good idea to set up a solo 401(k) now, even if you may add an employee who is not an eligible solo participant in future years. At that time the solo 401(k) plan can simply be suspended or terminated. (Source)

The amount you contribute to your 401k plan is not taxed before it is put into the plan.  It is not "tax free" but it is "tax deferred." 

This method of savings is far superior to taking money after taxes and investing that, or placing it in a savings account.  Let's say that your pay is $500 per week and your weekly taxes are $100.  If you take $100 out of your net pay of $400, you have already paid taxes on all your income.  In this case you would be living on $300 per week of spendable income if you invest $100 of after-tax pay.

If you are allowed to have the $100 deduction come out before taxes, you would be taxed only on the $400 taxable, or about $80 per week.  So, right off you have reduced your taxes by $20 per week.  It certainly is also true that you have $100 less spending money in your pocket -- but that is the purpose of the 401k -- to give you an incentive to save money, not spend it.  In this case you would be living on $320 per week of spendable income if you invest before-tax pay!

There is a string, of course, and that is that whatever you contribute to your 401k cannot be taken out except for three events:

  • If you reach retirement age, you can then take all the money out in one lump, subject to the tax rate you are in at that time -- presumably much lower than when you earned the money.

  • If you become disabled, you can take money out of the account.

  • If you die, the amount in this account is part of your estate -- and goes to whoever inherits your estate.

Keep in mind, however, while federal law sets the guidelines for what's permissible in 401(k) plans, your employer may set tighter restrictions. (Source)

The most common interest the employer has is to make contributions into the 401k in return for the employee's being required to stay employed for some certain number of years before the company portion of the account could be paid out.  Other company-planned restrictions can be a part of any plan created by the company.

One common restriction by a company is to say that you cannot borrow on or from your 401k while employed by the company, or even other similar restrictions.  These restrictions generally all have the purpose of encouraging maximum personal savings and engendering company loyalty -- often the company contribution has been made in stock of the company -- so when you have a sizable stock position in YOUR 401k, you would tend to have the owner's viewpoint.

The final details on the terms of company contribution will be set only after I have consulted with some providers of such plans -- our payroll company is such a possible source.  These providers have presumably studied the law (much more than I have) and can quickly tell whether this or that restriction is allowed within the 401k.

For planning purposes the Vibrant Life 401k plan will be open to all employees who have the status of "partner" and/or who receive 100% of their income from the profit sharing program. They would also be eligible to make their own personal contributions -- up to whatever the law allows.

The Company contribution will have the primary requirement that some pre-set participation in the Company Incentive Pay system exists.  Presumably for the top executives, they are expected to have 100% or almost that amount, of their pay based on the incentive system. 

Those who have 100% of their pay based on the incentive system will receive the maximum Company contribution into their 401k accounts.