A company 401(k) plan for your employees is one of the most popular and common of company-sponsored retirement plans available today. They can be a great way to encourage your employees to save for their retirement as they allow your team members to put money aside in a tax-deferred plan.

Tax Advantages

  • Employer contributions are deductible on the employer’s federal tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue Code.
  • Elective Deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.
  • The administrative costs of running the plan that are paid by the Plan Sponsor are tax deductible.

Several things can make 401(k) Plans very attractive to your employees:

  • In a traditional 401(k) plan, the money that employees defer from their paychecks is pre-tax, which means an employee contributes a portion of his wages before taxes are taken out. The employee’s taxable income then drops by the amount he contributed.
  • If a Roth feature is added to the 401(k), it allows employees to designate some or all of their deferrals as “ROTH elective deferrals” that are generally subject to taxation under the rules applicable to ROTH IRA’s. Roth deferrals are included in the employee’s taxable income in the year of deferral.
  • As an additional benefit, a 401(k) may offer an employer match in which the employer matches employee’s deferrals, up to a certain percentage. It’s basically “free money” to an employee.

-For example, if an employee grosses $60,000 a year and contributes 5 percent (or $3,000) and the employer matches that 5 percent and therefore also contributes $3,000, then the employee – even without taking any gains into account – has just seen a return of 100 percent on his contribution.

  • Some employers may also offer a profit-sharing contribution to their 401(k) plans.

Restrictions regarding early withdrawals

401(k) Plans do come with some strong restrictions regarding early withdrawals:

  • An employee cannot access any of his contributions or his employer’s until he reaches age 59 ½ (although he can if he leaves your employ when he’s 55 or older) without penalty
  • The early withdrawal penalty is 10 percent of the withdrawal total. The employee also will have to pay taxes on the money he withdraws (because it has become income).

Employees who leave your company

Those employees may take their contributions and vested employer contributions in one of three ways. They can:

  1. They may elect to keep it in your plan, letting it grow until they retire. (Some exceptions may apply).
  2. Withdraw the money from your plan (and take on applicable penalties), or
  3. Roll it over without penalty into an Individual Retirement Account (IRA) or another employer’s qualified plan.

Most employer-sponsored 401(k) plans are what are known as participant-directed plans, in which your workers may select from a number of different types of investments, most often a variety of stock, bond and money market mutual funds (or a mix).

401(k) Plans, especially those for which an employer offers a match and/or profit sharing contribution can be a great way to attract top-performing workers to your company.

If you do not yet offer a 401(k) Plan at your company and wish to, we will design plans that maximize the annual deferral limit each year while you and your employees work to strengthen their – and their families’ – futures.