Owing to their tax advantage and other benefits such as loan features, portability and employer contributions, 401(k) plans have become a lot popular since their inception. Generally, it is only the employer who can offer the 401(k) plan to employees who meet the eligibility criteria.For the employer to be able to offer the plan to an employee the general criteria that has to be met is,
- The employee must be below the age of 21 years.
- The employee must have completed one year of service with the company
- They must not have a collective bargaining agreement exempting them from the plan
Due to the popularity of the plans, most often they are used by employers as a tactic for hiring and retaining employees. For example, employers may lure in potential employees by offering attractive matching contributions that can range from a dollar-for-dollar match to more than that.
401(k) plans are not only beneficial to employees but employers as well; providing them with tax benefits. Depending on the type of benefits to offer and achieve, an employer may choose the right plan from the available options. The employer may choose to administer the plan themselves or may opt for an external plan provider.
Traditional 401(k) plan
With a traditional 401(k) plan, the employer gets most of the benefits and features of the provision (section 401(k) of the Internal Revenue Code) that designed the 401(k) plan. In this plan, the employer can choose to match employee contributions or make contributions for all employees, or do both. But the plans are subject to the ADP and ACP Non-discrimination Tests which are required by to be done annually.
Safe Harbor 401(k) plan
These plans are a great choice for companies that look towards maximizing contributions. Employer contributions are mandatory where the employer must choose to match employee contributions for all eligible employees or make non-elective contributions regardless of whether the employee makes the contribution. All employee contributions are fully vested. Also these plans are not subject to ADP and ACP Non-discrimination Tests; hence these plans are beneficial for highly compensated employees whose contributions are otherwise limited by non- highly compensated employees.
SIMPLE 401(k) plan
These plans can be offered only by employers having less than 100 employees who receive at least a compensation of $5,000 in the plan year. The employer also cannot offer any other retirement plans to the employees. One advantage of these plans is that they are not subject to annual non-discrimination testing. This lowers the administrative cost of the plan. Also, employer contributions are a must and are fully vested.
There are various other factors the employer may need to consider while choosing the plan. The employer’s choice of a plan can have a great effect on the employee’s retirement savings as these 401(k) accounts are made up of tax deferred contributions which may be invested into investment vehicles. Employees may also look at the benefits and features they get with the employer’s 401(k) plan while choosing that particular employer.
