Great 401(k) Plans Happen By Design

401(k) plans can be simple or complex, depending on employer concerns. Here are some important considerations that IFA's plan design professionals consider:

I. Contributions

  • 1. Employee deferrals
    • A. Is the maximum 401(k) deferral percentage consistent with the overall employer deduction and limit?
    • B. Is the maximum 401(k) deferral percentage consistent with the individual account additions limitation?
  • 2. Matching contributions
    • A. Do matching contributions encourage maximum participation of employees?
    • B. Are they affordable?
  • 3. Profit sharing contributions.
    • A. Are they used?
    • B. How are they determined?
  • 4. Eligibility requirements
    • A. How have the requirements to enter the plan been determined?
    • B. How have the requirements to receive employer matching or profit sharing contributions been determined?

II. Design aspects of funds within the 401(k) (account balances)

  • 1. Investment alternatives
    • A. How has the decision whether investments should be pooled or participant-directed been determined?
  • 2. Investment selection
    • A. How will individual investments be chosen?
    • B. What is the designated strategy?
  • 3. Vesting percentages
    • A. How has the vesting schedule been determined?

III. Design aspects of funds distributed from the 401(k) (distributions)

  • 1. Payments on termination of employment
    • A. Settlement options. How have they been selected?
    • B. Timing of distributions. When are distributions available to terminated participants? How has this been chosen?
  • 2. Loans
    • A. Have the needs of employees and administrative costs to the employer been considered when deciding whether loans should be permitted?
    • B. Has a loan policy been established?
  • 3. Hardship distributions
    • A. Have the needs of employees and administrative costs to the employer been considered when deciding whether hardship distributions should be permitted?
    • B. Has a policy for these distributions been established?

IFA's team of professionals can assist with special needs for advanced plan design to maximize deferrals, as well as to facilitate the essential compliance and reporting requirements of all plans, including:

  • • Actual Deferral Percentage (ADP) Test (IRC §401(k))
  • • Actual Contribution Percentage (ACP) Test (IRC §401(m))
  • • Multiple Use Test (where applicable)
  • • Coverage Test (IRC §410(b))
  • • Top Heavy Test (IRC §416)
  • • Maximum Deferral Limit Test (IRC §402(g))
  • • Annual Additions Limitations (IRC §415)
  • • Preparation of signature-ready Form 5500
  • • Preparation of plan-level reportable transactions
  • • Preparation of a reconciliation of items recorded in the 5500

Other important 401(k) plan design elements include:

  • 1. Eligibility. When should an employer allow employees to enter the 401(k) plan? The answer depends on whether the plan is being used to attract quality employees, or if employee turnover is a concern. How will the eligibility issue impact nondiscrimination testing? Ask the professionals.
  • 2. Additional Employer Contributions. A profit sharing feature is a real value-add for employers who want to add additional 401(k) contributions. However, the profit sharing formula requires separate design, and it can be "non-integrated," "integrated," or "age-weighted," depending upon how the employer desires to allocate such contributions. Learn which is best for you.
  • 3. Vesting. What is your vesting preference, and how will it impact testing? Employers may elect to have participants become fully vested immediately in profit sharing and/or matching contributions, or a vesting schedule may be selected.
  • 4. Availability of Loans and Hardship Withdrawals. Employers may choose to permit participants to access their accounts through loans or withdrawals, prior to termination of employment. However, certain considerations must be weighed when deciding whether to allow this move, including the administrative difficulties with making these options available and the financial needs of the plan participants.

Completion of plan design and document are essential first steps that will direct the future success of the plan. For owners looking to maximize their savings and provide participants with a prudent plan should work with an expert to identify the appropriate plan options and features. IFA has the right professional for each situation.

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