Maximize Deferrals with Prudent Plan Design

Advanced plan design is a critical element to owners enjoying a successful 401(k) plan.

Did you know that key design elements such as the determination of the employer's matching contribution may increase employee participation in the 401(k) plan? Increased employee participation is desirable for both employers and employees. The appropriate matching contribution can decrease employer costs by lowering the employer contribution that may be required to meet certain "nondiscrimination" requirements—a key benefit.

Our 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, 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. 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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