All about 401(k) Plans

Leslie O’Bryan, ERPA

What’s a 401(k) Plan? • A 401(k) plan is a form of profit sharing plan

that permits an employee to reduce current salary and have the employer contribute the amount of the salary reduction to the plan on behalf of the participant.

What’s a 401(k) Plan

• The employee contribution is termed a deferral, which can be a pre-tax or Roth contribution, if the plan allows for this option.

• The limit for each employee’s deferral for 2016 is $18,000.

Catch Up Deferral

• There is an additional amount available to employees who are 50 or older called “catch up” deferral. These employees are allowed to contribute an additional $6,000 in employee deferral in addition to the $18,000 from above.

Company Match • A 401(k) plan also allows for the opportunity

for the employer to do a company match, which can be completely discretionary and made per payroll period or annually. The formula is determined by the employer.

Vesting • This type of company match can also be

subject to a vesting schedule.

• Special nondiscrimination tests called Average Deferral Percentage tests (ADP) and Average Contribution Percentage (ACP) requiring the Highly Compensated Employees (HCEs) and Non Highly Compensated Employees (NHCEs) to be no more than 2% different.

401(k) Safe Harbor Plan • 401(k) plans utilizing the safe harbor rules must

provide for a required level of either matching contributions or non-elective (profit sharing) contributions for all eligible employees.

Safe Harbor Contribution • Basic safe harbor matching contribution formula is

100% up to the first 3% deferred and 50% of the next 2% deferred. Therefore, if the employee defers 5%, the company will match 4%. This match is fully vested to the employee from day one.

• Non-elective contribution formula is at least 3% of the eligible employee’s compensation. This non-elective contribution is fully vested to the employee from day one.

Safe Harbor Provision

• Must be identified as a Safe Harbor plan in the plan documents

• Eligible participants must receive written notice at least 30 days prior to beginning of each plan year that the plan is intended to be Safe Harbor plan and thus provides certain required information

• May not impose a hours requirement or a last day of employment requirement to receive employer Safe Harbor allocation

• Safe Harbor contributions are always 100% vested

For a 401(k) plan to allow the safe harbor provision, the following must be done:

Safe Harbor Benefits

• The benefit to the employer and business owner by adding a safe harbor provision is:– Avoids ADP/ACP tests (after-tax employee contributions

are still tested under ACP test. However Roth deferral contributions pass under the ADP test in a safe harbor plan.)

– Can help with discrimination testing of other employer profit sharing allocations (cross testing/new comp)

– Highly compensated employees can defer $18,000 without the issue of refunds or other employer contributions.

Provisions to Consider

Prevailing Wage Contributions

Prevailing wage contributions are immediately eligible from the first hour worked and must be put into the 401(k) plan.

Deferral, Match, and Profit Sharing

Deferral, match and profit sharing often require the employees to work at the company for one year before these provisions come into effect for the employee.

Once you know the employer’s plan

• The type of plan is determined by each employer to best fit their company’s model. Every company plan is different!– Eligibility: When can an employee participate?– Type of contributions and how much: Prevailing Wage,

Deferral, Match– Vesting: When is the employer contribution completely

the employees?– Distributions: When can an employee get money out of

a plan?– Investments: What types, when can an employee

change?

We would be happy to answer any questions that you may have about 401(k) plans.

LOBryan@benadms.com 859.255.1154