Our 200th post is from our guest blogger, Jay Beltz, ERPA, QPA, Pension Plan Services Director at PBTK:
Jay Beltz, Pension Plan Services Director
Much like the seemingly unlimited number of ways one can order a Starbucks drink, there are a high number of options available in designing a Section 401(k) plan. The variables can be seen in which employers can adopt such a plan, who must be covered by the plan, the available contribution sources, and the options to meet the required nondiscrimination tests.First, any sole proprietorship, partnership, LLC or Corporation can adopt a 40(k) plan; certain tax-exempt employers and state and local governments can too. When an individual, operating as a sole proprietorship adopts a plan, it is sometimes referred to as an individual or a solo 401(k) plan.
Only 70 percent of the non-excludable employees of an employer need to be covered by a plan. Further reduction is available if not all of the Highly Compensated Employees (HCEs) are covered (more than 5 percent owners and those with more than $115,000 of compensation in 2012). If no HCEs are covered, even fewer Non-Highly Compensated Employees (NHCEs) need to be covered. For example, division A employees could be covered and division B employees could be excluded.
401(k) plans are funded by both employee and employer contributions. Employee contributions include pre-tax salary deferrals, post-tax Roth salary deferrals, and both direct and indirect rollovers from other employer-sponsored qualified plans. Employer contributions include matching contributions, profit sharing contributions, top-heavy contributions, and those contributions needed to pass nondiscrimination testing: safe harbor contributions and qualified non-elective contributions and qualified matching contributions.
Options available to a plan sponsor for nondiscrimination testing include prior year versus current year testing, use of the otherwise excludable group (those that enter the plan earlier than one year of service), the use of the previously mention safe harbor contributions: either matching or non-elective, and the somewhat new Qualified Automatic Contribution Arrangement, or QACA.
While it is true that one size does not fit all in retirement plan design, there seems to be something for everyone. The large number of options available makes such a plan possible for almost all types of employers. Furthermore, the ability to revise a plan by adopting different options in the future makes 401(k) plans adaptable and flexible, leading to a healthy retirement program.