401(k) Plans
How These Plans Work
- Employees save for retirement with pretax and/or post-tax contributions that are fully vested at all times
- Pretax contributions and all earnings grow on a tax-deferred basis
- Plan assets are held in a trust that is protected from creditors of both the company and the employee
- When an employee retires or leaves the company, his/her account can be rolled over to an IRA or the next employer’s retirement plan (if that plan accepts rollovers) to continue the tax-deferred status
- Many companies provide matching contributions to bolster employees’ savings
- Often a vesting schedule will apply to matching contributions such that an employee might only get part of the matching account when he/she leaves the company
- Employees who are age 50 or over can make catch-up contributions
- Most plans allow employees to take a loan from their accounts
- Most plans permit employees to withdraw from their accounts to meet a financial hardship or provided that they have attained at least age 59-1/2
Things To Note
- Employee contributions and company matching contributions are subject to nondiscrimination testing to ensure that highly compensated employees do not overly benefit
- 401(k) contributions made by highly compensated employees might have to be refunded if nondiscrimination tests fail
- Employee 401(k) contributions and catch-up contributions must not exceed IRS prescribed annual limits
- Combined contributions from employee and employer must not exceed the IRS prescribed annual limits
- Low participation among non-highly compensated employees may result in frequent refunds to highly compensated employees
- Employees might need financial education on how to diversify their investments and/or more explanation on how they can benefit from participating in the plan
- The addition of a Roth 401(k) feature to the plan can enhance benefits for employees by allowing them to contribute on an after-tax basis but earnings are generally withdrawn tax-free
What We Can Do
- Evaluate your objectives and recommend possible plan designs, including “safe-harbor” designs that would eliminate the need for nondiscrimination testing
- Consult with you on regulatory changes and emerging trends
- Perform modeling to determine the costs of varying levels of matching contributions
- Perform annual coverage testing of the plan and nondiscrimination testing of employee and company contributions; identify corrective measures if tests fail
- Assist in vendor searches to find appropriate service providers for your plan
- Help with employee communications, including communication materials, employee meetings and workshops
- Prepare plan documents, plan amendments, and required communications to employees
- Assist in qualifying your plan with the IRS, including preparation of IRS submissions
- Provide administration for your plan – daily valuation or traditional recordkeeping, process loans and distributions, including preparation of required governmental information returns related to distributions from the plan
- Prepare the annual 5500 return/report required by the IRS, including any necessary interface with the plan’s independent auditors
- Assist you with any IRS or DOL audit of your plan