- 401(k) Plans are one of the most popular choices when saving for retirement. By using this tax-qualified, deferred compensation plan an employee can elect to have their employer contribute a portion of their cash wages to the plan on a pre-tax basis, commonly referred to as elective deferrals. The amount that the employee may elect to defer to the plan is limited.
How do you determine if this is the right retirement plan for you? Some of the key advantages are:
- Elective deferrals to the plan and investment gains are not subject to federal income taxes until distributed from the plan.
- Elective deferrals are always 100% vested.
There are 3 types of 401(k) Plans that Salem Schooner offers, Traditional 401(k) plans, Safe Harbor 401(k) plans and Simple 401(k) plans.
Traditional 401(k) Plans
These plans allow the eligible employee to make pre-tax deferrals through payroll deductions. A traditional 401(k) plan gives the employer the option to make contributions on behalf of the participants plan or based on the employees’ deferrals or both. These employer contributions can be subject to a vesting schedule. Rules relating to traditional 401(k) plans require that contributions made under the plan meet specific non-discrimination requirements. In order to ensure that the plan satisfies these requirements, the employer must perform annual tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
Safe Harbor 401(k) Plans
A Safe Harbor 401(k) plan is similar to a Traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The Safe Harbor 401(k) plan is not subject to the complex annual non-discrimination tests that apply to Traditional 401(k) plans.
Employers sponsoring Safe Harbor 401(k) plans must satisfy certain employee notice requirements. The notice requirements are satisfied if the employer provides each eligible employee with written notice of the employee's rights and obligations under the plan and the notice satisfies content and timing requirements.
In order to satisfy the content requirement, the notice must describe the Safe Harbor method used, how eligible employees make elections, any other plans involved, etc.
Both the Traditional and Safe Harbor plans are for employers of any size and can be combined with other retirement plans.
Simple 401(k) Plans
If you are a small business looking to provide an effective, cost-efficient approach for a Retirement Program for you employees, then this plan was created for you. . A SIMPLE 401(k) plan is not subject to the annual non-discrimination tests that apply to Traditional 401(k) plans. As with a Safe Harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.
If you are interested in any of the 401(k) plans we have highlighted please contact us.
