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					                                           401(k)

        The 401(k) is a retirement plan implemented and provided to employees by their
employer as a means to save for their retirement. Not only do many employers contribute
to the employees 401(k) along with employee contributions (this is known as matching),
but the contributions are pre-tax contributions; in other words the deduction is taken prior
to calculating the state and federal taxes due on the wages. This helps not only the
employee, but also the employer.
        There are several variations of the 401(k) and depending upon your employer’s
status as a small business, and their ability to fund a 401(k), you may operate under a
SIMPLE 401(k), a traditional 401(k), or The Safe Harbor 401(k). All the plans vary as to
their contribution limits, the employers required matching contributions, and the level of
administration and IRS reporting that must be factored into the plan upkeep. Let’s take a
look at each of the plans, and discuss some of the advantages and disadvantages of each.
        The SIMPLE 401(k) is best suited for small businesses that have a reliable
earnings stream. In other words, their cash flow and earnings level are fairly steady and
reliable, and they want to establish an easily controlled method for providing for
retirement funding. Quite often, many of the family members will participate in the
401(k) as a way to fund their own retirement, and offset some of the taxable income from
the family business. The disadvantage in operating this type of retirement account lies in
the fact that contributions made on behalf of the employee by the employer are not
optional, and some form of contribution must be made each year.
        The traditional 401(k) is the most often avoided plan by small to medium sized
businesses, simply because of the massive reporting requirements, and the compliance
testing that must be done each year. The administrative costs for the traditional 401(k)
for a company of about 10 employees costs around $2000 per year to administer, and that
doesn’t include the setup costs or the costs of loan features. In addition to the optional
features costs, there is the cost of offering many investment choices. Most of the 401(k)
plans for small businesses that were surveyed had a much better rate of participation as
well as lowered plan costs when only a few options were offered, instead of 10 or more.
        The compliance testing that must be done with the traditional 401(k) are quite
complex, and require much involvement by the accounting or payroll department of the
business. Today, many small businesses outsource their payroll function, and include the
401(k) plan administration as one of the outsourced functions also. The greatest
advantage to the small business is that the business is not required to contribute to the
plan, unless there is a significant imbalance in the contributions of the highly
compensated employees versus the lesser paid employees.
        The Safe Harbor 401(k) is a spin-off of the traditional plan, except for the fact that
there aren’t all the compliance requirements and testing that must be completed each
year. The Safe Harbor plan is best suited for the small business that has a steady revenue
stream, and that is able to make a required contribution each year to the employee fund.
The employer must make a 3% contribution to all employees who qualify for retirement
funding, regardless of whether the employee makes a contribution; also, the employer
contribution level for non-highly compensated employees must not differ more than 2%
from the highly compensated employee contribution rate. In this manner, the employer is
required to provide the same benefits for all employees, without all the compliance
testing of the traditional plan. The Safe Harbor 401(k) is simple to set up, and can be
accomplished within 30 days of the new year, and is simple to administer. The
disadvantage to this plan is the required contribution rates, and if the business does not
have a steady cash or revenue flow, it is not a recommended plan.
        After examining the different plan options available for small to medium
companies, there should be at least one that fits within any small businesses scope of
operations. Providing retirement funding for small business family members, as well as
all other employees is one of the greatest benefits a company can offer current and
prospective employees.

				
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posted:7/8/2011
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