For employers who are looking to remain competitive in a tight job market, it pays to have a great benefits package to offer employees. 401(k) retirement plans can be the cornerstone of a comprehensive benefits package, helping companies to attract top talent and to increase employee satisfaction and morale.
When it comes to designing and implementing 401(k) plans, it is important to have the company’s needs, goals, and budget in mind. This may include encouraging employee contributions, simple plan design, or maximizing tax savings for the business. With this information, our team of Benefits Consultants can help employers to put together a retirement plan and overall strategy that meets the needs of their company.
401(k) Retirement Plans: An Overview
A 401(k) is a defined contribution retirement plan established by an employer for the benefit of employees. These plans are regulated by the Employee Retirement Security Act (ERISA), and have strict rules and regulations, as well as certain protections, as a result.
Once established by an employer, a 401k plan must be offered to all eligible employees. The account is funded by contributions from the employee, and may also include a certain percentage of matching contributions from the employer. In traditional 401(k) plans, businesses are not required to contribute to employee 401(k) plans, although many choose to do so. In most cases, the funds contributed in a 401(k) account are invested in a variety of investment vehicles, including but not limited to: stocks, bonds, mutual funds, and money market funds. Each year, the IRS determines the limit on the total maximum contribution to a 401(k) plan.
Many 401(k) plans have certain tax advantages. Contributions and earnings on the funds are typically not taxed until they are distributed. This may allow for employees to defer the income taxes on this sum until after they have reached retirement age, and are in a lower tax bracket. Early withdrawals from a 401(k) account may result in additional taxes and penalties. Because contributions made by employees may reduce their overall salary, payroll taxes for employers may also be reduced as a result. Any employer contributions and administrative costs are tax-deductible expenses for the company.
Because 401(k) plans are regulated by federal law, there are specific requirements that employers must satisfy in order to remain compliant. The plan sponsor must ensure that the plan document complies with the Internal Revenue Tax Code, and confirm that the plan is administered in accordance with the plan document and all applicable laws. Employers are also required to file annual forms with the IRS.
IFG’s Consultants can work with a business to design a 401(k) plan that fits their needs, as well as manage ongoing administrative and compliance-related tasks. IFG offers a variety of 401(k) plan options to our clients, including:
Traditional 401(k) Retirement Plans
A traditional 401(k) plan is set up and administered by the employer. Once established, this plan allows eligible employees to make pre-tax contributions to the account through payroll deductions. Employers can choose to make contributions on behalf of plan participants, match a portion of employee contributions, or do both. Employers can also choose to not contribute to employee accounts. In many cases, the plan can be designed so that ER contributions are subject to a vesting schedule to reduce employee expense. A traditional 401(k) can be utilized by employers of any size, and can be combined with other types of retirement plans. These plans carry some administrative and overhead costs, and are subject to non-discrimination testing to ensure that all employees are fairly represented within a retirement plan.
Non-Traditional 401(k) Retirement Plans
For owners of smaller businesses, including sole proprietors and partnerships, non-traditional 401(k) options may be a viable option. These plans typically offer reduced costs and simpler administration, and may permit business owners to fund their own retirements through the same plan. Safe Harbor and SIMPLE 401(k) plans require employer contributions, but reduce administration by eliminating compliance with non-discrimination testing. Individual 401(k) plans may allow for sole proprietors and partnerships to contribute to a retirement plan as both an employer and employee. Each of these plans has distinct advantages that can be evaluated by IFG’s Consultants in light of a business’ goals and objectives.
Safe Harbor Plans
Like traditional 401(k) plans, Safe Harbor retirement plans may allow for employees to make pre-tax contributions to a retirement savings account via payroll deductions. However, unlike a traditional 401(k) plan, employer contributions to a Safe Harbor plan are generally required. An employer must either fully match the first 3% of an employee’s salary and 50% of the next 2% of salary, or provide a contribution of 3% of salary for all eligible employees. In many Safe Harbor Plans, all contributions to a Safe Harbor account are immediately vested. Because employer contributions are required, these plans are not subject to annual anti-discrimination testing as long as the plan meets the requirements under the Internal Revenue Code. These plans also may allow for a business owner to contribute the maximum amount to his own retirement savings account.
Simple 401(k) Plans
A SIMPLE 401(k) plan may also allow for employees to make pre-tax contributions to their retirement savings accounts through payroll deductions. As with Safe Harbor plans, employers are required to make contributions to employee accounts that are fully vested. Comparatively, employee contribution limits to SIMPLE 401(k) plans may be lower than other types of 401(k) plans, resulting in lower required contribution amounts for employers. Employees can take out loans against their SIMPLE 401(k) retirement savings, which is a significant advantage for many employees.
These plans are generally available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer in the previous calendar year. Employers cannot have another type of retirement plan in the same year that they have a SIMPLE 401(k) plan. These plans are exempt from certain annual non-discrimination testing. For employers, these plans may a suitable option for a retirement plan due to relatively simple administration, low overhead costs, and reasonable required contributions.
Individual 401(k) plans are an option for sole proprietors or partners without employees. These plans are similar to other types of 401(k) plans, with the exception that the owner of the business can make contributions as both an employer and an employee. This may allow for small business owners without employees to maximize their retirement savings and reduce their tax burdens. Individual 401(k) plans may also feature higher employer contribution limits when compared to 401(k) plans that are deductible for the employer as a business expense.
Under an Individual 401(k) structure, business owners can then make pre-tax contributions as an employee. Total contributions between employer and employee are subject to a limit defined by the IRS, and cannot exceed 100% of total compensation. With an Individual 401(k), business owners are permitted to borrow against their retirement savings. Individual 401(k) plans are easy to set up, flexible, and are low-cost.