Business 401(k) Services / Economics
401(K) PLAN DESIGN
What Is 401(K) Plan Design?
401(k) plan design refers to how your 401(k) plan is set up and what options or provisions it includes. This touches on everything from employer match to vesting schedules and more.
When you create a new 401(k) plan for your business or make changes to your company’s 401(k) plan, you have the opportunity to design a plan that works for your business. There are a series of 401(k) plan design considerations that will determine everything from who can participate, what part of their income they can save, and what (if any) kinds of contributions you’ll make as an employer to your employees’ retirement accounts.
Five 401(K) Plan Design Considerations
1. 401(k) Eligibility
401(k) eligibility covers when a new employee can start saving into the plan, what categories of employees are able to enroll (for example, number of hours worked per week, age, etc.) and when an employee can enroll (for example, monthly or annually).
2. Employee and Employer 401(k) Contributions
First, when it comes to employee contributions, you can determine how frequently an employee can update their savings rate. You may choose to adopt an auto enrollment feature that sets a default contribution amount for employees who don’t opt-out or select a different amount for themselves. On the employer contributions side, you can customize your plan according to your goals and budgetary considerations.
For example, you may choose to offer a non-elective Safe Harbor contribution that gives eligible employees an annual employer contribution of 3% of their salary. This amount is immediately fully vested and the employee gets it whether or not they contribute to the plan.
A non-elective safe harbor contribution can be very helpful for employers who want to save more of their own money while still passing compliance tests. Alternatively, you may not want to offer an employer contribution at all, or you may opt for a simple employer match or a profit sharing arrangement.
3. 401(k) Vesting
“Vesting” refers to when an employee can call the employer contribution ‘theirs’. While your employees will immediately own 100% of the money they contribute, it’s up to you to determine when they own the money your business contributes into their accounts, if any. You can choose to implement a vesting schedule that offers immediate vesting or sets a time limit (no more than 1 year) before employer contributions are fully vested—or anything in between.
4. 401(k) Distributions
There are times when an employee may need to take funds out of their retirement account. Maybe they leave your company long before retirement age and want to roll their savings over into a new 401(k) or individual retirement account (IRA), or they reach retirement age and are ready to start withdrawing their funds for use in retirement. Your 401(k) plan will have rules that dictate how money is distributed.
5. 401(k) Loans
You can decide whether or not to offer 401(k) loans through your company plan. If you do make this option available, part of your plan document will outline exactly how loans work, including how much of an employee’s balance they’ll be able to take out as a loan, what repayment schedules look like, and how much interest an employee will repay as part of the loan agreement.
Can 401(K) Plan Design Options Be Changed?
Your 401(k) plan can evolve and change over time as your business evolves. While you do need to make these plan design decisions whenever you create a new 401(k) plan, you’re also able to update your plan. While some big changes can’t take effect until the end of the plan year, many features can be added simply by amending your plan document and communicating changes to your employees.
Who Can Help With 401(K) Plan Design?
As an employer considering different types of 401(k) plans, it is ultimately up to you to design your 401(k) plan according to your vision for the benefit—but you can get help and guidance from a Third Party Administrator or a 401(k) consultant. A reliable 401(k) partner can make the plan design process easy for you, focusing on asking the right questions to understand your goals. Maybe you’re looking to save more as a business owner, or just looking to get your employees more retirement-ready.
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