This is the first in a three-part series about 401k retirement plans. In this article, we look at the ways in which employers can afford to put together and offer a meaningful 401k plan to their employees.
A 401(k) is one of the most common retirement investment options offered by employers in the United States today. It’s not surprising why; these plans provide both employers and employees with a flexible way to save money for retirement and have been around for almost 40 years.
However, if you’re an employer who hasn’t offered a 401(k) benefit before – or even if you have – it’s important to understand the basics before you decide on the plan that’s right for your organization.
What is a 401(k) plan, and how does it work?
A 401(k) is an investment plan that allows employees to contribute a percentage of their salary to a designated retirement account. Contributions to the 401(k) are invested in a portfolio made up of mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options.
These deferred contributions are usually taxable only when the employee makes a withdrawal: typically at retirement. 401(k) plans offer a good way for employees to save money for their futures, and for both employers and employees to save on taxes.
What role does the employer play in a 401(k) plan?
Unlike a pension, employers are not obliged to make contributions to employees’ 401(k) retirement accounts.This flexibility makes the overall costs much more manageable. While it isn’t required, many employers choose to match 401(k) contributions up to a certain percentage or make contributions based on a profit-sharing arrangement, as an added benefit for their employees. These matching funds can be modified or eliminated at the employer’s discretion.
Why do employers offer 401(k) plans as an employee benefit?
One of the primary reasons companies offer 401(k) plans is to attract and retain top talent at every level of the organization. A 401(k) is attractive to employees because it provides a simple, cost-effective way to plan for retirement by making tax-deferred contributions to an investment fund. However, employees aren’t the only ones who receive tax benefits from a 401(k) plan. Employers can also deduct contributions made to their employees 401(k) accounts.
What are the requirements of a 401(k) plan?
The IRS requires that a 401(k) plan satisfy a list of criteria, including but not limited to: · Contribution limits: The IRS determines annual contribution limits for 401(k) plans.
There are two limits: one for employee contributions, and the other for overall contributions (including the total of all employee and employer contributions). Employees who are age 50 and older by the end of the year may also make additional “catch-up” contributions up to an amount determined by the IRS.
What are distribution rules?
The money inside a 401(k) plan grows tax-deferred, but withdrawals must meet specific conditions, such as the employee’s retirement, death, disability, or separation from employment. Additionally, if an employee reaches the age of 59.5 or experiences a hardship, as defined and permitted by the plan, they may also withdraw funds.
What are the limits for high-income earners?
As determined by the IRS, employees whose annual income or percentage ownership in the company meets a specific threshold may only contribute a portion of their earnings.The IRS performs non-discrimination testing (NDT) on 401(k) plans to ensure that these highly compensated employees are not contributing disproportionately more than other employees at the company
GCW Capital Group has developed an expertise in advising business owners looking to set up and/or reorganize 401k plans that will provide long-term benefits for employers as well as their employees. If you are a business owner in need of 401K advice, give us a call and let’s start adding a whole new benefit to your business.