Employee Benefits 401(K)

The 401(k) plan is established under the Internal Revenue Code section of the same name. A standard 401(k) plan allows employees to elect to save a portion of their income, free from tax, in an interest-bearing account. Employers may additionally choose to match their employees’ contributions to a 401(k) plan with their own contribution to the account. This will impact the company’s bottom line but can also greatly increase employee participation.

Bonus or Profit-Sharing Plan vs Thrift Plan

There are two main types of 401(k) plans: bonus or profit-sharing and thrift plans. With a bonus plan, contributions are made in the form of a traditional bonus given to employees at the end of each year. At this time, each employee chooses whether to receive the bonus upfront or have the amount contributed to their plan. Sometimes, employees may be allowed to take part in the declared profit-sharing distribution in cash and contribute the remainder to their 401(k) plan.With a thrift plan, employees can elect to receive a reduced salary while contributing the difference to their plan. The employee’s salary is deducted from each paycheck at a fixed percentage, which can be altered once or twice yearly. This deduction is then deposited directly into the employee’s 401(k). Many employers choose to make matching employer contributions (either dollar for dollar or 50 cents on the dollar) when implementing a thrift plan.

Plan Requirements

When considering offering 401(k) plans to your employees, it’s important to note that this comes with certain requirements. For example, employers must include a written plan communicated to employees, the plan must be implemented for the exclusive benefit of employees and/or beneficiaries, and the plan must not discriminate in favor of highly compensated employees.

The plan also must provide for a qualified joint and survivor annuity and contain a spendthrift provision. The employer is additionally required to provide a separate account for each participant and use a consistent method of accounting to properly allocate income, expenses, gains, losses, and forfeitures from other participants into each plan participant’s account.

SIMPLE Plans

Employers with 100 employees or less may choose to set up a Savings Incentive Match Plan for Employees (SIMPLE). SIMPLE plans are cheaper and offer greater administrative ease than other retirement options, but they come with lower annual contribution limits, resulting in less retirement savings annually than other options. SIMPLE Plans are available as a 401(k) plan or an IRA.

By putting pre-tax compensation in a 401(k), employees can maximize their contributions toward retirement. Through matching the funds of their employees’ contributions, employers can take full advantage of a this plan. Looking to implement a 401(k) plan for your business? Call ISU Armac today to get started.