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Types of 401k plans and how to operate them for small business
With the easy availability in setting up a 401(k) plan even small businesses can now offer one for their employees.401(k) plans are a great benefit to the employees of any company and are fairly easy to set up.The challenge facing any business owner is to determine what kind of 401(k) to set up and how best to operate them for their small business.Here is an overview of different kinds of 401(k) plans to get you started-
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- Traditional 401(k) plan-This type of plan offers the maximum flexibility in any type of 401(k) plan. Employers have the discretion to make contributions on behalf of all participants, to match employees' deferrals, or to do both. These contributions can be subject to a vesting schedule (this provides that an employee's right to employer contributions becomes theirs only after a period of time). In addition, one of the biggest benefits to employees is that through a traditional 401(k) participants make pre-tax contributions through payroll deductions. Annual rating/testing ensures that benefits for rank and file employees are proportional to benefits for owners/managers.This plan is for an employer of any size and can be combined with other retirement plan.
- Safe harbor 401(k) plan-This plan is similar to a traditional 401(k) plan, but, among other things, must provide for employer contributions that are fully vested when made. However, it is important to understand that the Safe Harbor 401(k) is not subject to many of the complex tax rules that are associated with a traditional 401(k) plan, including annual nondiscrimination testing.This type of plan can work for employers of any size and can be combined with other retirement plans.
- SIMPLE 401(k) plan-This type of plan was created so that small businesses could have an effective cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that will apply to the traditional plans. Similar to other 401(k) plans, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is only available to employers with 100 or fewer employees who received at least $5000 in compensation from the employer for the preceding calendar year. In addition, employees that are covered by a SIMPLE 401(k) plan can not receive any contributions or benefit accruals under any other plans of the employer.
Once you have decided on the type of plan for your small business, you will also have flexibility in choosing some of the plan's features.These features can include which employees can contribute to the plan and how much. Other features that are written into the plan are required by law. For example, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.
- Small business owners should realize that once they have established a 401(k) plan, they assume certain responsibilities in operating the plan. If you have hired someone to help in setting up your plan, that arrangement also may have included help in operating the plan. If this is not the case, another important decision will be whether to manage the plan yourself or hire a professional or financial institution to take care of some or most aspects of operating the plan. Elements of a 401(k) plan that need to be handled include:
- Nondiscriminationparticipation
- Contributions-this includes whether or not you will match employees contributions
- Vesting
- Investing 401(k) monies
- Fiduciary responsibilities
- Disclosing plan information to participants
- Reporting to government agencies
- Distributing plan benefits
Typically, any 401(k) plan includes a mix of rank-and-file employees and owner/managers. However, some employees can be excluded from a 401(k) plan if they:
- Are not 21 years old
- Have not completed a year of service
- If they are covered by a collective bargaining agreement that does not provide for participation in the plan, or if retirement benefits were the subject of good faith bargaining.
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