1081.01 (401k) Plans
Easily the most popular retirement plan, the 401(k) is a very flexible plan that can be implemented by companies of all sizes, from sole proprietors to large, publicly traded firms. Employers are responsible for establishing the plan and, once established, the employee chooses to defer a certain portion of his/her annual salary into the plan. In a participant-directed plan (the most common type), the employee makes his/her own investment decisions. Meanwhile, in a trustee-directed 401(k), the employer-appointed trustees make the investment decisions on behalf of their employees.
401(k) plans offer many features that make them attractive, including the ability of the employer to customize the plan based on their own specific needs. Another advantage is that employers are not required to make any employer contributions. However, 401(k) plans require more administration and can cost more than some of the other retirement plan options. Still, its flexibility makes the 401(k) a popular choice for large and small businesses alike.
Advantages of a 401(k)
- Tax Deferral – Employees can make salary deferrals on a pre-tax basis of up to $15,000 in 2013 ($16,500 for age 50 or older).
- Matching Contributions – Employers may make matching and profit-sharing contributions that, when combined, total up to a maximum of 25 percent of compensation. In 2013, the combination of employee deferrals and employer contributions may total up to the lesser of $51,000 or 100 percent of compensation.
- Flexibility – Employer can determine matching formulas and vesting schedules of employer contributions and may implement features such as automatic enrollment for newly eligible employees and automatic deferral increases for all participants.
Other 401(k) Considerations
- Loans and hardship withdrawals are permitted.
- Eligibility requirements can be established to allow for exclusion of part-time and seasonal employees.
- Require more administration than other plans, resulting in higher costs.
- Nondiscrimination testing is required.
- IRS Form 5500 filing is required.