Defined Contribution Plans
These plans offer many different design options, giving the employer maximum flexibility in deciding how their plan will operate. A 401(k) plan with an employer match is one common type of defined contribution plan.
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Key Types of 401(k) Contributions
401(k) plans offer various contribution types and are subject to multiple discrimination tests. It is crucial to consider these tests alongside your company’s objectives when designing your plan. Provisions such as eligibility, vesting, and in-service distributions can determine whether a plan is more beneficial for the employer or the employees. We are here to guide you through these decisions, ensuring your plan’s design is optimized for maximum benefits and compliance.
401(k) contributions are voluntary contributions made by employees to their employer-sponsored retirement savings plan on a pre-tax basis. These contributions are deducted directly from the employee’s paycheck and may be matched, in whole or in part, by the employer up to a certain percentage of the employee’s salary. This arrangement allows employees to take control of their own retirement; a valuable benefit useful in attracting and retaining talent.
Roth contributions are made to retirement accounts using after-tax dollars, meaning taxes are paid upfront on the contribution amount. These contributions grow tax-free, and qualified withdrawals in retirement, including earnings, are tax-free as well. Roth contributions offer individuals the opportunity to build a source of tax-free income in retirement, providing flexibility in managing tax liabilities and potentially maximizing retirement savings.
Offering a match in a 401(k) plan provides employees with a valuable incentive to save for retirement. By matching a portion of the employee’s contributions, employers effectively contribute additional funds to the employee’s retirement account, effectively increasing their overall retirement savings. This employer match serves as a form of compensation, enhancing employee satisfaction and loyalty, while also helping to attract and retain talent. Additionally, the employer match encourages employees to maximize their contributions, accelerating the growth of their retirement nest egg and promoting long-term financial security.
Profit sharing contributions can serve as a valuable supplement to employee retirement savings, enhancing overall retirement readiness and financial security. With a pro rata profit sharing design, the employer contributes to all eligible participant accounts a contribution as a percentage of compensation. Since all participants receive a uniform percentage as profit sharing, this design automatically satisfies the discrimination tests mandated by the IRS.
This type of profit sharing design provides employers with more flexibility in choosing how to allocate the profit sharing contribution. Since owners and employees can receive different amounts as a percentage of compensation, this plan design is subject to IRS discrimination testing. It is commonly used by owners to bring their annual contribution up to the IRS limit for the year, while still providing employees with a generous boost in retirement income.
By committing to a generous match that is 100% vested, an employer can satisfy various discrimination testing requirements automatically. The match traditionally is 100% on deferrals up to 3% of pay plus an additional 50% of deferrals on the next 2%. Anyone deferring 5% or more of their compensation would receive a 4% match using this formula.
By committing to a generous nonelective contribution – similar to profit sharing – that is 100% vested, an employer can satisfy various discrimination testing requirements automatically. The contribution is typically equal to 3% of compensation to anyone eligible to make 401(k) deferrals into the plan. This design is often combined with new comparability profit sharing as the 3% safe harbor nonelective counts towards employee profit sharing minimums.
OUR SERVICES
Defined Contribution / 401(k) Plan Services
Consulting
We take a proactive approach in ensuring retirement plans are optimally designed to meet your goals and objectives. Plan design is critical for defined contribution plans as discrimination test failures can be costly.
Plan Documents and Restatements
Preparation of all legal plan documents, which establishes the plan in the eyes of the IRS. Plan document restatements as required every 6 years approximately.
Preparation of Filings and Notices
Preparation of the Form 5500 (Plan Tax Return) along with any associated schedules and disclosures. Annual notices for safe harbor and automatic enrollment features are included as well.
Contribution Calculations
Precise calculation of employer contributions, including matching contributions and profit sharing, tailored to meet plan specifications and compliance requirements, while maximizing tax advantages and benefits for both employers and employees.
Distribution Processing
Our distribution processing service for 401(k) plans ensures efficient and compliant handling of participant distributions, including loans, hardship withdrawals, and rollovers, while minimizing administrative burdens and enhancing accuracy.
Compliance Corrections
Identification and correction of plan failures, ensuring your 401(k) remains compliant with IRS and DOL regulations, protecting your plan from penalties and maintaining its qualified status.
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