By Mar Sue Durrbeck, Guest Columnist
Q: My employees have been asking if we can start a 401(k) plan. I’m not opposed, but I’m concerned about the financial burden it may put on our company. What can I tell them?
A: Employer-funded defined benefit plans are rapidly disappearing from organizations’ benefits packages. It is to the employees’ credit that they are taking responsibility for funding their own retirement. The question then becomes, “How can it be done in a way that is advantageous to both the employer and employees?”
Let’s first look at why an employer would want to start a 401(k):
- A well-designed plan can help attract and keep talented employees.
- A plan can benefit both owners/managers and front-line employees by providing a systematic vehicle for accumulating retirement funds.
- Tax deductions are available for employers’ contributions, which means a 401(k) plan may not cost as much as employers think it will.
The concerns often expressed by employers are that additional benefits will cause additional administrative burdens and may even require a financial commitment that a small company cannot fulfill year after year. However, there are a variety of plan designs that employers may choose from which should mitigate these concerns.
The questions you need to ask yourself to choose the right plan for your business include:
- Do you want to include all employees or some defined groups or segments of the employee population?
- What is the maximum salary deferral you are looking for?
- What kind of vesting schedule do you want?
- Do you want both the employer and employee to make contributions?
- Do you want flexibility in the amount of employer contributions from year to year?
- How do you feel about employees taking loans from the plan?
By answering these questions, you are well on your way to exploring whether a 401(k) plan is advantageous to your company and its employees.
Plans fall into two types: company-only funded plans and plans that include both salary deferral and company contributions. The latter type, where there is the most growth, includes three types of plans: Traditional 401(k), Safe Harbor 401(k), and Simple IRA.
This plan offers the maximum flexibility of the three types. Employers can make contributions on behalf of all participants, match employees’ deferrals, or do both. These contributions can be subject to a vesting schedule. Participants can make pre-tax contributions through payroll deductions. Annual testing ensures that benefits for front-line employees are proportional to benefits for owners/managers.
Safe Harbor 401(k)
This is similar to the Traditional plan but must provide for employer contributions that are fully vested when made. This means that employer contributions are available to employees whenever they leave the organization. Employee pre-tax contributions are always 100 percent vested. One of the Safe Harbor plan’s advantages is that it is not subject to many of the complex tax rules associated with the Traditional 401(k), including annual nondiscrimination testing.
This plan was created especially for employers with fewer than 100 employees. As its name implies, it is simple (and less costly) to administer. It includes deferrals from employees as well as contributions from the employer. The employer contribution can be in the form of a 3 percent match to employee contributions or a 2 percent employer contribution for all eligible employees.
Whatever plan you decide to use, this is not something you want to do on your own. Your accountant, attorney and financial advisor will help you design the best solution for your organization and its employees.
For additional information, visit the IRS and U.S. Department of Labor’s (DOL’s) Employee Benefits Security Administration websites, www.irs.gov/ep and www.dol.gov/ebsa. On the IRS site, click on “More Topics” and then “Types of Retirement Plans.” On the DOL site, click on “401(k) plans.”
Mar Sue Durrbeck is a Registered Financial Consultant and Financial Planner affiliated with New England Financial, 707 Skokie Blvd, Northbrook, IL, 847-897-5477. Visit her website atwww.marsuedurrbeck.nef.com.