401[k] Plans

The sponsoring employer may or may not contribute to the plan.

Frequently, the employer obligates the company to a “matching” contribution. For example, the employer may match an employee’s contribution dollar-for-dollar; may promise to match employee contributions at $0.50 on the dollar, etc.

Employers may also make additional discretionary contributions over and above the match.

In 2021, the employer and employee contributions, when combined, may not exceed $58,000 ($64,500 with the “catch-up”).

Typically, a plan benefits a mix of rank-and-file employees and owner/managers. However, some employees may be excluded from a 401(k) plan if they:

• Are covered by a collective bargaining agreement that does not provide for participation in the plan, if retirement benefits were the subject of good faith bargaining.
• Have not attained age 21;
• Have not completed a year of service

Employees cannot be excluded from a plan merely because they are older workers.

Any established business entity such as a Corporation, Sole Proprietor, or Partnership seeking to maximize tax deductions and provide a substantial retirement benefit for owners and other long-term quality employees.

After you decide on the type of 401(k) plan, you can consider a variety of investment options. One decision you will need to make in designing a plan is whether to permit your employees to direct the investment of their accounts or to manage the monies on their behalf.  If you choose the former, you also need to decide what investment options to make available to the participants. Depending on the plan design you choose, you may want to hire someone either to determine the investment options to make available or to manage the plan’s investments. Continually monitoring the investment options ensures that your selections remain in the best interests of your plan and its participants.

A safe harbor 401(k) 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, 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 non-discrimination testing.

Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.

Safe Harbor 401(k) Plan – Under a safe-harbor plan, you can match each eligible employee’s contribution, dollar for dollar, up to 3 percent of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not 5 percent, of the employee’s compensation. Alternatively, you can make a non-elective contribution equal to 3 percent of an employee’s compensation to each eligible employee’s account. Each year you must make either the matching contribution or the non-elective contribution.

• The ROTH 401(k) is an optional feature.  It does not require a new document; however, one may amend an existing document.
• Employees at ANY income level can participate and their contributions are made on an after-tax basis.
• One advantage of the ROTH feature in 401(k) plans is qualified distributions come out income tax free if taken 5 years from first deposit, attainment of age 59 ½, or due to death or disability.
• ROTH 401(k) employer contributions are matched on a pre-tax basis and are therefore subject to income tax on withdrawal.
• When employees terminate they may roll over their ROTH 401(k) account to a ROTH IRA.
• For those 50 and over the catch-up contribution may go to the ROTH 401(k) account.
• Contributions to the 401(k) account can be all ROTH or part ROTH and part traditional.
• ROTH and traditional deposits are all included in ADP testing.
• ROTH 401(k) deposits can be made regardless of one’s income level, unlike IRA limitations.

The easiest way to determine one’s retirement income needs is to subtract how much will come from Social Security Benefits, personal savings, any other employer plans, inheritance if any. What is left over is the shortfall.

Example:
Now one has to determine the amount of money necessary to fund the income shortfall.

Here is a worksheet:

Many believe retirees can best preserve their assets if their annual withdrawal rate is 6% or less of invested assets. This assumption provides a quick and easy formula for determining the total amount necessary to save by retirement.  In other words, divide your desired annual income by the withdrawal rate (100,000 / 0.06 = $1,666,667).

This is not meant to be exhaustive or comprehensive, but a starting point in one’s consideration of retirement planning.

A 401(k) with automatic enrollment is one in which the employees are automatically enrolled and monies are deposited into the plan directly from their paycheck. Generally speaking, the employee’s contribution starts at 1% of gross income.

Think about it this way: $1 per $100 of gross wages is contributed on the employee’s behalf to the 401(k) and now becomes eligible for any and all employer matches.

The employee can withdraw from the plan at any time; there is no obligation to participate.

The thought is that, once enrolled, the employees will continue to contribute and therefore save for the inevitable retirement.

Here is an interesting article in USA Today, Money Section: Automatic enrollment in 401(k) plan is first step

Did you know most rank-and-file employees have inadequate retirement savings?  Did you know most rank-and-file employees have no idea of how much money they need to have a satisfactory retirement, and that, indeed, most feel they will have to work, at least part-time, during retirement?