401(k) PLANS AT A GLANCE
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A highly desirable employee benefit available to employers of all sizes
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Powerful employee recruitment and retention tool
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Allows an employee to set aside tax-deferred funds from each paycheck
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Employer contributions are discretionary, but can include matching contributions or profit sharing plans
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Employer can establish vesting schedule
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Complicated reporting and testing requirements are generally handled by qualified third party (such as financial firm or independent-benefit advisor)
YOU ARE NOT TOO SMALL FOR A A 401(k) PLAN
Many small business owners think of 401(k) plans as the kind of benefit that only larger businesses can offer. But today, 401(k) plans are for businesses of any size and can be a powerful tool for recruiting and retaining valued employees. For example, if you are a self employed individual, a 401(k) plan can be implemented for under $200 dollars the first year and $75 dollars in subsequent years.
FLEXIBLE SAVINGS
A 401(k) is a defined contribution pension plan that allows employees to set aside tax-deferred funds with each paycheck. It offers a higher level of salary deferrals by employees than most other retirement plans.
401(k) plans also provide great flexibility in terms of employer contributions, which are entirely discretionary. You can, for example, create a 401(k) that uses only employee deferrals, making it a straight retirement savings plan for you and your employees. On the other hand, to turn a 401(k) into a more compelling benefit, many employers make some kind of contribution, either by matching employee contributions or providing some form of profit sharing. These employer contributions are tax deductible. Combined employee and employer contributions can account for as much as 25 percent of an employee’s eligible compensation or $45,000, whichever is less.
A POWERFUL BENEFIT
Employees often view 40l (k) plans as a highly appealing benefit. Not only can they potentially reduce their tax burden by sheltering some of the income, but also with many 401(k) plans, they can choose from a menu of different investment options and control how they want to manage these funds. When they leave your employ, they take their funds with them and can roll them over into another 401(k) or IRA.
Employee deferrals to a 401(k) plan vest immediately, but employers can determine the vesting schedule for the contributions they make. This schedule can be used as an incentive for retaining employees, encouraging valued workers to stay in order to maximize their benefits.
To be eligible to participate in a 401(k), an employee must be 21 years and have completed 1,000 hours of service over the past year. An employer can also elect a more liberal eligibility requirement.
NOT SO COMPLEX MANAGEMENT
Administration of 401(k) plans can be complicated, and is typically done by a qualified third party (such as a financial firm or independent benefit advisor) that may charge an annual fee and a per-employee management fee. This fee covers issues related to administration, paper work and compliance testing.
There must be a written plan that is communicated to employees. It must provide full details of the plan, including, for example, matching formulas, investment alternatives, and vesting options. The plan also must go through highly involved, annual non-discrimination testing to ensure that it does not favor highly compensated employees. The plan administrator generally handles this.
There are significant reporting requirements. The employer must make annual tax filings to the IRS using Form 5500. Separate reports may need to be filed with the Department of Labor and the Pension Benefit Guaranty Corporation (PBGC). Separate reports must be furnished to the plan participants and their beneficiaries.
Selecting the right retirement plan is an important business decision and we would be happy to help you learn more about 401(k) plans and whether they are an appropriate solution for your business.
If you already have a 401(k) plan in place, contact us to find out if it's the right plan for you. To learn more about how 401(k) plans can be a part of your company's employee benefit program, contact us for a free evaluation and consultation.