Finding a 401(k)
A tax advantaged retirement plan has become a much appreciated benefit for employees. For many employers a 401(k) seems a good choice. But several options exist.
Following are some of the 401(k) plan options and their benefits:
Traditional 401(k). Employees may contribute on a pretax basis. Employers may choose to match a percentage or all of their contributions. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and doesn’t favor highly compensated employees. Also, once a plan has 100 or more participants, an audit of the plan generally is required, so it’s important to keep an eye on the plan’s participant growth.
In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.
Roth 401(k). Employees contribute after-tax dollars but take tax-free withdrawals, subject to certain limitations. Other rules apply, such as employers cannot contribute to a Roth, only traditional 401(k) accounts. Therefore a Roth 401(k) is usually offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.
The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.
Safe harbor 401(k). For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and highly compensated employees can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees haven’t been contributing enough.
To qualify for the safe harbor election, the employer needs to either contribute three percent of compensation for all eligible employees, even those who don’t make their own contributions, or match 100 percent of employee deferrals up to the first three percent of compensation and 50 percent of deferrals up to the next two percent of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.
Savings Incentive Match Plan for Employees (SIMPLE) 401(k). If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there’s no rigorous testing.
So, how is the SIMPLE 401(k) different from a safe harbor 401(k)? Both the required employer contributions and the limits on participant deferrals are lower: The employer generally needs to either contribute two percent of compensation for all eligible employees or match employee contributions up to three percent of compensation. The employee deferral limits are $12,500 in 2018, with a $3,000 catch-up contribution for those age 50 or older.
This is a very brief look at the types of 401(k) plans available. These plans are an additional value to offer employees to help attract and maintain them. But it’s important to select the right plan for you. We are here to help. Our firm has been auditing and advising employers on employee benefit plans for the past 30 years. For help selecting the right plan for your business contact Jeff Spencer, CPA, Ciuni & Panichi, Inc. Tax Department Principal at 216-831-7171 or by email here.
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