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Evaluating a 401(k) Plan for Your Business


January 17, 2022

Evaluating a 401(k) Plan for Your Business

It seems that 401(k) plans have become the retirement plan of choice for many businesses. While they offer many advantages for the company and the employees, there are several issues that should be considered when evaluating them.

Why have a 401(k) or any other type of retirement plan?

  • Offering a retirement plan as part of an employee benefits program helps three parties - the business, the owner, and the employees.
  • The right type of retirement plan can become an integral part of the management of your business. It can help attract, retain, and motivate your employees. In an environment where keeping valued employees is becoming more difficult, a good retirement plan, and effective communication about the plan, can be powerful tools.
  • The right plan, properly structured, can also help the owner of the business build a substantial retirement nest-egg.
  • Finally, employees are keenly aware of the need to take control of their future financial security. Providing assistance with a company sponsored retirement plan will help them reach their retirement goals.

What is a 401(k) plan?

A 401(k) plan is a company-sponsored profit-sharing plan that allows employees to defer a portion of their wages into investment options of their choice. Employers have the flexibility to make contributions and can offer some form of matching contributions to their employees. The employer contribution flexibility and employee contribution aspects of 401(k) plans are part of the reason so many companies have chosen this form of retirement plan. The employer match and the investment flexibility of many plans are some of the reasons that now more than40 million Americans are choosing to participate in 401(k) plans.

Why consider a 401(k) plan?

If your business has many employees and you want to provide an appealing employee benefit to retain control over some aspects of a retirement plan, a 401(k) plan may be the most attractive alternative. This form of retirement plan can also allow for larger contributions than many other types of plans.

Key aspects of a 401(k) plan.

  • Any employer with one or more employees can establish a 401(k) plan. Usually, this type of plan can be economi­cally feasible when a company has at least 25 employees.
  • These plans allow for employees to contribute pre-tax dollars for their own benefit. It brings employees into the process of planning for their own retirement.
  • The contribution limits are larger than those found with most other types of plans. Employees can defer up to $19,500 for 2021 into their account. The total contribu­tion, including employee and employer contributions, is limited to 25% of compensation up to $58,000 for 2021.
  • The 2001 tax law also created a “catch-up” contribution provision for participants ages 50 and older. Under this provision, in 2021, an eligible participant can contribute an additional $6,000.
  • The employer can attach a vesting schedule to any company contributions. This provides a strong motivation for employees to remain with your company. Employee contributions are immediately vested.
  • The company can have control over some level of their contributions. Usually, the plan document provides a certain level of contribution matching of employee deferrals but can allow the company to make a discretionary contribution, usually based on fi­nancial results.

The 401(k) plan must be made available to all employees who are at least 21 years of age and worked at least 1000 hours. It may also be made available to part-time employees who have three consecutive years with 500 hours of service.

  • Most 401(k) plans provide a great deal of investment flexibility. Participants choose where to invest their money among many alternatives. Usually, there area number of mutual funds and often an option for company stock (if the company is publicly held).
  • There are annual filings that must be made with the IRS and special testing to ensure the plan does not discriminate in favor of highly compensated employees.

Investigating 401(k) plans further

The key parties needed for establishing and administering a 401(k) plan are an administrator and an investment manager. Many investment managers, including banks, mutual fund companies and some investment advisors, offer special bundled programs that include administra­tive services as well as their investment management options. There are IRS and Department of Labor filing requirements with 401(k) plans that can be part of their services as well.

What do employers need to know about the NJ Secure Choice savings program?

Businesses that meet the criteria for NJ Secure Choice must enroll all employees who are at least 18 years of age, work full or part time and receive an annual Form W-2, Wage and Tax Statement – those who receive Form 1099-NEC, Nonemployee Compensation – are excluded.

Which employers does this affect?

NJ Secure Choice applies to for-profit and non-profit employers in the public sector who have:

  • 25 or more employees
  • Been in business for at least two years
  • Not offered a qualified retirement savings program in the past two years

Businesses with fewer than 25 employees may also participate in NJ Secure Choice, but are not required to do so.

When does it take effect?

The anticipated implementation date was March 28, 2021, but the program deadline was extended one year due to COVID-19. The revised deadline to begin implementation is March 28, 2022, with nine months from the start date to complete the roll out, though an official schedule has not been announced. Similar plans in other states rolled out their programs in phases – 100+ employees, 50+ employees and 25+ employees – each with different qualified implementation periods.

How can employers comply with the NJ Secure Choice Savings Act?

Employers have to either implement NJ Secure Choice by their assigned deadline or offer their employees a qualified retirement plan through the private market.

At Provident Bank, our financial advisors can assist with a financial review for you and for your business.

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