Today, 401(k) plans remain extremely popular retirement vehicles. If you’ve considered establishing a 401(k) plan for your company but didn’t know where to start, have no fear – we can help.
With a 401(k) plan, an employee can choose to defer some portion of his or her salary. So, rather than receiving that particular amount in their paycheck, the employee defers, or delays, receiving that money. In this case, the deferred money goes into a 401(k) plan sponsored by the employer. This deferred money generally is not taxed by the federal government, or by most state governments, until it is distributed.
A relatively new feature available in 401(k)s is the ability for participants to save part of their own pay in the plan, but on an after-tax basis. Referred to as Roth 401(k) plans, these Roth contributions will also grow tax-free.
In most 401(k) plans, the employer matches the employee contributions to some degree, though this is not required. The employer can also make company profit sharing contributions on a discretionary basis from year to year.
You can make a 401(k) plan as simple or as complex as you want to. A 401(k)/Profit Sharing plan can be used in combination with another type of plan, such as a Defined Benefit/Cash Balance Plan, to achieve a higher contribution level.
Advantages to 401(k) plans include:
- Employer and employee contributions are tax-deductible.
- Employees may contribute more to a 401(k) plan than into Individual Retirement Account (IRA) plans.
- 401(k) plans are advantageous if cash flow is an issue.
- Optional participant loans and hardship withdrawals add flexibility for employees.
Disadvantages to 401(k) plans include:
- The requirement of filing a Form 5500 annually.
- It’s necessary to test that benefits do not discriminate in favor of highly compensated employees. This testing can get complicated.
- Additional withdrawal and loan flexibility adds an administrative burden for the employer.
Is a 401(k) plan right for your company?
JC Actuarial Benefit Consultants, Inc. will help you choose the type of plan that will benefit your employees, maximize your tax savings and help your retirement assets reach their fullest potential.