401(k) Retirement Plans
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.
A 401(k) is a provision added to a profit sharing plan, however profit sharing may be discretionary.
- 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.
- Some employers may also offer a profit-sharing contribution to their 401(k) plans.
Restrictions regarding early withdrawals401(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 companyThose employees may take their contributions and vested employer contributions in one of three ways. They can:
- They may elect to keep it in your plan, letting it grow until they retire. (Some exceptions may apply).
- Withdraw the money from your plan (and take on applicable penalties), or
- Roll it over without penalty into an Individual Retirement Account (IRA) or another employer’s qualified plan.
WHO is an Ideal Plan Sponsor?
- Goal: Plan Sponsors looking to attract and retain employees, as well as defer income for their own retirement.
- Demographic: Companies of any size. Eligible employees, regardless of age, can contribute to a 401(k) plan up to 100% of their annual compensation or the annual limit.
- Generosity: Although 401(k) plans do not require any employer contributions, they are still subject to non-discrimination testing. If a plan fails non-discrimination testing due to low employee engagement, two options may be available to resolve the issue:
- A Qualified Nonelective Employer Contribution (QNEC) can be made to non-highly compensated employees.
- A Corrective Distribution of excess contributions can be made to highly compensated employees.
WHY work with a Third Party Administrator (TPA)
- Consultative plan design can ensure that your plan conforms with your businesses’ retirement plan objectives.
- A TPA can assist in monitoring your plan’s evolution; as your business grows, so too will your plan needs.
- TPAs help ensure your annual plan data and participant records are accurate, and assist in keeping your plan compliant with IRS and DOL requirements.