401(k) Plans
401(k) plans, with or without a matching contribution by the employer, offer a low-cost savings mechanism for a start-up company that is desirous of creating a culture of savings for its employees. Normally participants are given an investment choice from a menu of alternatives. Often these choices are allowed to be switched on a daily basis with certain restrictions. Thus, participants receive benefit statements periodically which show their deferrals, employer matching contributions, earnings and losses and their vesting percentages.
It is becoming more typical for employers to automatically enroll their employees into the plan once they meet the eligibility requirements. Recent laws and regulations allow plan fiduciaries to avoid liability for participants who do not make investment elections by defaulting them into what is known as a Qualified Default Investment Alternative (QDIA).
As a 401(k) sponsor becomes more profitable, we often see discretionary matching contributions being made to a plan that will further the incentive for employees to save.
All employee deferrals are pre-tax and all employer contributions as well as employee deferrals are deductible by the plan sponsor. The maximum limits in plans change from year to year and are based on a governmental cost-of-living adjustment.
These plans, like all retirement plans, are subject to the requirement that they not be discriminatory in favor of highly compensated employees. There are various ways to abate this issue through Safe Harbor 401(k) type structures which require the employer to contribute more money to the plan. Otherwise, there are precise year end tests that need to be performed to make sure the non-discrimination rules are met.
Participants over the age of 50 can make additional “catch-up” deferrals that are not subject to discrimination testing.
