a 401(k) Plan for Your Business
It seems that 401(k)
plans have become the retirement plan of choice for many businesses. While
they offer many advantages for the company and the employees, there are
several issues that should be considered when evaluating them.
Why have a 401(k)
or any other type of retirement plan?
- Offering a retirement
plan as part of an employee benefit program helps three parties - the
business, the owner and the employees.
- The right type
of retirement plan can become an integral part of the management of
your business. It can help attract, retain and motivate your employees.
In an environment where keeping good employees is becoming more difficult,
a good retirement plan and effective communication about the plan can
be a powerful tool.
- The right plan,
properly structured, can also help the owner of the business build a
substantial retirement nest-egg.
- Finally, employees
are keenly aware of the need to take control of their future financial
security. Providing assistance with a company sponsored retirement plan
will help them reach their retirement goals.
What is a 401(k)
A 401(k) plan is a company sponsored profit-sharing plan that allows employees
to defer a portion of their wages into investment options of their choice.
Employers have the flexibility to make contributions and can offer some
form of matching contributions to those of their employees. The employer
contribution flexibility and employee contribution aspects of 401(k) plans
are part of the reason so many companies have chosen this form of retirement
plan. The employer match and the investment flexibility of many plans
are some of the reasons there are that now over 40 million Americans are
choosing to participate in 401(k) plans.
Why consider a
If your business has many employees, you want to provide an attractive
employee benefit and you want to retain control over some aspects of a
retirement plan, a 401(k) plan may be the most attractive alternative.
This form of retirement plan can also allow for larger contributions than
many other types of plans.
Key aspects of
a 401(k) plan.
- Any employer with
one or more employees can establish a 401(k) plan. Usually, this type
of plan can be economically feasible when a company has at least 25
- These plans allow
for employees to contribute pre-tax dollars for their own benefit. It
brings employees into the process of planning for their own retirement.
- The contribution
limits are larger than those found with most other types of plans. Employees
can defer up to $18,000 (in 2015) into their account. The total contribution,
including employee and employer contributions, is limited to 25% of
compensation up to $53,000 for 2015.
- The 2001 tax law
also created a "catch-up" contribution provision for participants
ages 50 and older. Under this provision, in 2015, an eligible participant
can contribute and additional $6,000 to his or her plan.
- The employer can
attach a vesting schedule to any company contributions. This provides
a strong motivation for employees to remain as with your company. Employee
contributions are immediately vested.
- The company can
have control over some level of their contributions. Usually, the plan
document provides a certain level of contribution matching of employee
deferrals, but can allow the company to make a discretionary contribution,
usually based on financial results.
- The 401(k) plan
must be made available to all employees at least 21 years of age who
worked at least 1,000 hours in the previous year.
- Most 401(k) plans
provide a great deal of investment flexibility. Participants choose
where to invest their money among many alternatives. Usually, there
are a number of mutual funds and often an option of company stock (if
the company is publicly held).
- There are annual
filings that must be made with the IRS and special testing to ensure
the plan does not discriminate in favor of highly compensated employees.
The key parties needed for establishing and administering a 401(k) plan
are an administrator and an investment manager. Many investment managers,
including banks, mutual fund companies and some investment advisors, offer
special bundled programs that include administrative services as well
as their investment management options. There are IRS and Department of
Labor filing requirements with 401(k) plans that can be part of their
services as well.