401k Plans

401(k) plans are the most popular type of retirement plan used today.

401k plans can be a powerful tool in promoting financial security in retirement and are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.

Choosing a Retirement Plan: 401(k) Plan

Highlights:

Sometimes it seems as though everyone has a 401(k) plan these days. Did you ever consider getting one yourself but just don’t know how they work?

Have no fear. We’re here to help you.

Really.

With a 401(k) plan, employees can choose to defer some of their salary. So instead of receiving that amount in their paycheck, the employee defers, or delays, getting that money. In this case, their deferred money is going into a 401(k) plan sponsored by their employer (that would be you). This deferred money generally does not get taxed by the federal government or by most state governments until it is distributed.

If you establish a 401(k) plan, you:

Can have other retirement plans.
Can be a business of any size.
Need to annually file a Form 5500.
You can make a 401(k) plan as simple or as complex as you want to. A pre-approved 401(k) plan might be just the thing here if you want to cut down on administrative headaches and expenses.

Information List:

Pros and Cons:

Greater flexibility in contributions.
Employees may contribute more to this plan than under IRA plans.
Good plan if cash flow is an issue.
Optional participant loans and hardship withdrawals add flexibility for employees.
Administrative costs may be higher than under more basic arrangements.
Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.
Additional withdrawal and loan flexibility adds administrative burden for the employer.
Who Contributes: Employee salary deferrals and/or Employer contributions. Employees are always 100% vested in their salary deferrals. Employer contributions may be vested on a graduated vesting schedule.

Contribution Limits:
Employee - $12,000 in 2003 with annual increases in $1,000 increments until the limit is $15,000 in 2006. If the employee is aged 50 and over, an additional “catch-up” contribution is allowed. The additional contribution amount is: 2003 - $2,000 ; 2004 - $3,000; 2010 - $4,000; and 2006 - $5,000.

Employer/Employee – The lesser of 25% of compensation or $40,000.

Filing Requirements: Annual filing of Form 5500 is required.

Participant Loans: Permitted.

In-Service Withdrawals: Yes, but subject to possible 10% penalty if under age 59-1/2.

Investment Websites and other Links

Atlantic Financial's services.

www.atlanticfinancial.com/rollovers

401k to IRA Rollovers for Individual Investors

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401(k) Plans - Establishing A 401(k) Plan

When you establish a 401(k) plan you must take certain basic actions. For instance, one of your first decisions will be whether to set up the plan yourself or consult a professional or financial institution – such as a bank, mutual fund provider, or insurance company – to help you establish and maintain the plan.

Initial Actions

Here are four basic actions necessary to have a tax-advantaged 401(k) plan:

Adopt a written plan,
Arrange a trust fund for the plan’s assets,
Develop a recordkeeping system, and
Provide plan information to participants.

Adopt a written plan – Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide it. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you are bound by the terms of the plan document.

Before beginning a plan document, however, you will need to decide on the type of 401(k) plan that is best for you – a traditional 401(k), a safe harbor 401(k), or a SIMPLE 401(k) plan.

A traditional 401(k) plan offers the maximum flexibility of the three types of plans. Employers have discretion to make contributions on behalf of all participants, to match employees’ deferrals, or do both. These contributions can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). In addition, a traditional 401(k) allows participants to make pre-tax contributions through payroll deductions. Annual testing ensures that benefits for rank and file employees are proportional to benefits for owners/managers.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, must provide for employer contributions that are fully vested when made. However, the safe harbor 401(k) is not subject to many of the complex tax rules that are associated with a traditional 401(k) plan, including annual nondiscrimination testing.

Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.

A SIMPLE 401(k) plan was created so that small businesses could have an effective cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to the traditional plans. Similar to a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5000 in compensation from the employer for the preceding calendar year. In addition, employees that are covered by a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.

Once your have decided on the type of plan for your company, you will have flexibility in choosing some of the plan’s features -- such as which employees can contribute to the plan and how much. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.

Arrange a trust fund for the plan’s assets – A plan’s assets must be held in trust to assure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions to and from the 401(k) plan. Since the financial integrity of the plan depends on the trustee, this is one of the most important decisions you will make in establishing a 401(k) plan. If you set up your plan through insurance contracts, the contracts do not need to be held in trust.

Develop a recordkeeping system – An accurate recordkeeping system helps track the flow of money – contributions, earnings and losses in participants’ accounts, plan investments, expenses, and benefit distributions. If you have a contract administrator or financial institution assist in managing the plan, that entity typically will help in keeping the required records. In addition, a recordkeeping system will help you, your plan administrator, or financial provider prepare the plan’s annual return/report that must be filed with the Federal government.

Provide plan information to employees – As you put your 401(k) plan in place, you must notify employees who are eligible to participate in the plan about your plan’s benefits and requirements. A summary plan description or SPD is the primary vehicle to inform participants and beneficiaries about the plan and how it operates. The SPD typically is created with the plan document. You will need to send it to all plan participants. In addition you may want to provide your employees with information that emphasizes the advantages of joining your 401(k) plan. Employee perks – such as pre-tax contributions to a 401(k) plan, employer contributions (if you choose to make them), and compounded tax-deferred earnings – help highlight the advantages of participating in the plan.

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