Forms of 401(okay) Plans | Which Is Proper for Your Enterprise?


Right here’s the news: 70% of personal business employees have entry to employer-provided retirement plans. Do yours? In the event you don’t provide staff a small enterprise retirement plan, like a 401(okay), it could be time to hop on the bandwagon. Learn on to be taught concerning the kinds of 401(okay) plans to select from. 

About 401(okay) plans 

A 401(okay) plan is an employer-sponsored retirement plan supplied as an worker profit. Staff can select how a lot they contribute every paycheck to their retirement plan, and there are a number of retirement plan options that simplify contributions. When the worker reaches a sure age or meets sure standards, they’ll make withdrawals. 

The kinds of 401(okay) choices include tax advantages to the account holder. Some 401(okay) plan contributions are pre-tax whereas others are post-tax. 

Employers can contribute to worker 401(okay) plans, too. In truth, some plans require employer contributions. 

In the event you contribute to a 401(okay) plan as an employer, set guidelines for contributions, resembling a ready interval (e.g., staff should give you the results you want for six months earlier than you start contributing). Additionally, chances are you’ll restrict the quantity you contribute (e.g., you match 50% of the worker’s contribution, as much as 8%). 

Restrict alert! The IRS limits the quantity an worker or employer can contribute to a 401(okay) plan. This restrict can change yearly. 

Why do you have to provide a 401(okay) plan?

On the fence about together with a 401(okay) plan in your worker advantages bundle? Listed below are a number of causes to supply a 401(okay) plan:

  • Worker attraction and retention: 81% of staff stated retirement advantages are vital throughout a job search
  • Tax credit: You might be eligible to assert 401(okay) tax credit (with enhanced tax credit because of the SECURE Act)
  • State necessities: Some states require employers to offer retirement plans to staff (e.g., California) 

Enhancing your employer model and scoring tax credit are two added bonuses for voluntarily beefing up your advantages bundle with a retirement plan. However if you happen to’re topic to a state-mandated retirement plan, the selection isn’t yours—you have to present a retirement choice to remain compliant. 

Need to make providing 401(okay) plans simpler?

Patriot has partnered with Vestwell, a retirement platform trusted by small companies throughout all 50 states, to supply payroll with seamless 401(okay) integration.

Forms of 401(okay) plans 

So, what choices do you’ve got in relation to 401(okay) plans? Listed below are the various kinds of 401(okay) plans you possibly can have at your enterprise:

  • Conventional 401(okay) plans
  • Secure harbor 401(okay) plans
  • SIMPLE 401(okay) plans
  • Roth 401(okay) plans
  • Solo 401(okay) plans* (not for workers) 

Most retirement plans may be mixed with different plans. For instance, staff can have each conventional and Roth 401(okay) plans.

Every of the 401(okay) varieties fluctuate when it comes to flexibility, contribution limits, and plan necessities. Examine every 401(okay) plan choice earlier than making a choice on which path to go in your firm.

Types of 401(k) plans: Traditional, safe harbor, SIMPLE, solo, and Roth

Conventional 401(okay) plans

Beneath a standard plan, staff contribute a portion of their wages earlier than revenue taxes to their 401(okay). Nonetheless, withhold Social Safety and Medicare (aka FICA tax) taxes on the worker’s gross pay earlier than deducting the worker’s 401(okay) contribution. 

With this plan, some employers match a portion of the worker’s 401(okay) contributions (e.g., 50% as much as 6%). Employer matching and nonelective contributions are not topic to FICA or federal revenue tax

Conventional 401(okay) plan necessities

Who can provide a standard plan: A personal or public employer of any dimension can provide a standard plan to staff.

Contribution necessities: You possibly can both contribute for all individuals (even when they don’t contribute), make matching contributions based mostly on an worker’s elective deferral, or each. You possibly can topic contributions to a vesting schedule the place your employer contributions to an worker’s plan turn out to be nonforfeitable after a sure period of time (e.g., three years).

Contribution restrict: Staff can defer as much as $23,000 to their 401(okay) retirement plan in 2024. Staff who’re 50 or older can contribute a further catch-up contribution that additionally modifications yearly. The extra contribution restrict for 2024 is $7,500. The quantity of employer and worker contributions mixed can’t be bigger than the annual restrict. The restrict should be the lesser of 100% of the worker’s compensation or $69,000 for 2024.

Plan necessities: To arrange a standard 401(okay) plan, create a plan doc that follows IRS guidelines, set up a belief for the plan’s belongings, preserve good 401(okay) information (e.g., contributions and values), and supply data to taking part staff.

Submitting necessities: File Kind 5500, Annual Returns/Studies of Worker Profit Plan annually to report worker profit plan data.

In the event you select a standard 401(okay) plan, you have to conduct an annual nondiscrimination check to make sure the contributions don’t simply profit extremely compensated staff. The check compares the common wage deferrals of extremely compensated staff to non-highly compensated staff. Carry out and go the Precise Deferral Share (ADP) and Precise Contribution Share (ACP) exams to maintain a standard 401(okay) plan. Test the IRS’s web site for extra data on the ADP and ACP exams.

Secure harbor 401(okay) plans

A protected harbor 401(okay) plan is a particular kind of retirement plan that mechanically passes the nondiscrimination check. Which means you don’t need to go an ADP and ACP check annually as you do with a standard 401(okay) plan.

Secure harbor 401(okay) plans are standard with small companies as a result of employers can keep away from the money and time it takes to go nondiscrimination exams annually. However there’s one caveat: you might be required to contribute to an worker’s protected harbor retirement plan.

With a protected harbor plan, you have to contribute to an worker’s 401(okay), no matter their title, compensation, or size of service.

Secure harbor 401(okay) plan necessities

Who can provide a protected harbor plan: Companies of any dimension can provide a protected harbor 401(okay) plan.

Contribution necessities: It’s essential to make both an eligible matching (primary or enhanced) or nonelective contribution. A primary match is a 100% match on the primary 3% of deferred compensation, plus a further 50% for every contribution that’s over 3% however below 5%. An enhanced match is a 100% match on the primary 4% of deferred compensation. A nonelective contribution is 3% (or extra) of compensation, no matter worker deferrals. Employer contributions are required to be totally vested, and your staff are assured your contributions to their protected harbor 401(okay) plan.

Contribution restrict: The contribution restrict for a protected harbor 401(okay) plan is similar as a standard 401(okay) plan. Staff can defer as much as $23,000 (2024) and the extra contribution restrict for 2024 is $7,500. The quantity of employer and worker contributions mixed can’t be bigger than the annual restrict. The restrict should be the lesser of 100% of the worker’s compensation or $69,000 for 2024.

Plan necessities: Employers should give every eligible worker a written discover that lists their rights and obligations. Present written discover to eligible staff earlier than every plan yr.

Submitting necessities: Like conventional 401(okay) plans, file Kind 5500 annually in case you have a protected harbor plan.

SIMPLE 401(okay) plans

A SIMPLE 401(okay) plan is right for small enterprise homeowners or self-employed professionals with 100 or fewer staff. This kind of plan is a simplified model of a standard 401(okay) plan.

A SIMPLE 401(okay) plan combines the options of a standard plan with the simplicity of a SIMPLE IRA. And with a SIMPLE 401(okay), you don’t have to carry out nondiscrimination exams.

Beneath a SIMPLE 401(okay) plan, your contributions are nonforfeitable as quickly as you contribute them. Nonetheless, staff who take part in a SIMPLE 401(okay) plan can not obtain contributions and accruals with some other employer-sponsored retirement plan.

Easy 401(okay) plan necessities

Who can provide a SIMPLE 401(okay) plan: Small companies with 100 or fewer staff can provide a easy 401(okay). If your enterprise exceeds the 100-employee restrict, there’s a two-year grace interval earlier than that you must change your 401(okay) plan. To qualify for the grace interval, you have to have had a SIMPLE 401(okay) plan for at the least one yr and now not qualify because of enterprise progress. 

Contribution necessities: It’s essential to contribute to your staff’ plans. Each the worker and employer contributions are pre-tax. As an employer, you have to make both an identical contribution of as much as 3% of every worker’s pay or a nonelective contribution of two% of every eligible worker’s pay.

Contribution restrict: Staff can solely contribute as much as $16,000 in 2024 below a SIMPLE 401(okay) plan. Staff who’re 50 years or older can contribute as much as a further $3,500 for 2024. 

Plan necessities: To ascertain a SIMPLE 401(okay) plan, create a written plan, get it authorised by the IRS, and clarify the written plan to your staff. 

Submitting necessities: File Kind 5500 in case you have a SIMPLE 401(okay) plan at your enterprise.

Roth 401(okay) plans

A Roth 401(okay) plan is analogous to a standard 401(okay). However with a Roth 401(okay), you take care of post-tax deductions as a substitute of pre-tax. Withhold taxes from an worker’s gross pay earlier than you defer their wages to the 401(okay) plan.

When an worker retires, withdrawals from conventional 401(okay) accounts are taxed at peculiar revenue charges. However with a Roth 401(okay), withdrawals are usually tax-free.

Like the standard 401(okay) plan, you additionally have to carry out annual nondiscrimination testing on Roth 401(okay) plans. A Roth 401(okay) plan should be a separate account from the opposite 401(okay) plans you provide. Right here’s the whole lot that you must find out about establishing a Roth 401(okay) plan in your staff.

Roth 401(okay) plan necessities

Who can provide a Roth 401(okay) plan: Companies of any dimension can provide a Roth 401(okay) plan.

Contribution necessities: Employers should not required to contribute to staff’ Roth 401(okay) plans. Nonetheless, you possibly can select to match your staff’ contributions to a Roth 401(okay) plan.

Contribution restrict: Staff can contribute a most of $23,000 to their Roth 401(okay) plan in 2024. Staff age 50 or older can contribute a further $7,500 in 2024.

Plan necessities: It’s essential to provide a standard 401(okay) plan along with a Roth plan. Create a plan doc, set up a belief for the plan’s belongings, and supply data to taking part staff. 

Submitting necessities: File Kind 5500 yearly. 

Solo 401(okay) plans*

You can’t provide a solo 401(okay) plan to your staff. A solo 401(okay) plan solely has one participant—you. It’s a standard 401(okay) plan designed particularly for a enterprise proprietor or self-employed particular person with no staff other than their partner or enterprise companions. This kind of plan can be known as a person 401(okay), self-employed 401(okay), or solo-k.

The plan permits the employer to contribute as each an employer and an worker. This enables enterprise homeowners to maximise retirement contributions and enterprise deductions. All contributions you make are tax-deductible.

Solo 401(okay) plan necessities

Who can provide a solo 401(okay) plan: Sole proprietors, self-employed people, small enterprise homeowners, or people with no staff aside from a partner or companions. 

Contribution necessities: You possibly can contribute as each the worker and the employer. You don’t have to contribute because the “employer.”

Contribution restrict: In a solo 401(okay), you’re each the worker and the employer. As the worker, you possibly can contribute as much as $23,000 or 100% of compensation (whichever is much less) for 2024 AND make a further profit-sharing contribution of as much as 25% of your compensation. If you’re over 50 years previous, a further $7,500 catch-up contribution is allowed for 2024. Your complete contribution (excluding catch-up contributions) can not exceed $69,000 in 2024.

Plan necessities: You probably have an Employer Identification Quantity (EIN), you possibly can open a solo 401(okay) account so long as you meet eligibility necessities.

Submitting necessities: File Kind 5500-EZ, Annual Return of One-Participant (House owners and Their Spouses) Retirement Plan yearly.

401(okay) varieties: Fast-reference chart 

For all you skimmers on the market, right here’s a fast comparability chart of the various kinds of 401(okay). Use it to check necessities, contribution limits, and employer contribution necessities. 

401(okay) Kind Who Can Set up the Plan? Contribution Restrict (2024) Do Employers Have to Contribute?
Conventional 401(okay) Plan Anybody Staff below 50: $23,000
Staff 50 or older: $30,500
No
Secure Harbor 401(okay) Plan Anybody Staff below 50: $23,000
Staff 50 or older: $30,500
Sure
SIMPLE 401(okay) Plan Employers with 100 or fewer staff Staff below 50: $16,000
Staff 50 or older: $19,500
Sure
Roth 401(okay) Plan Anybody Staff below 50: $23,000
Staff 50 or older: $30,500
No
Solo 401(okay) Plan Companies with NO staff (aside from a partner or companions) Staff below 50: $23,000
Staff 50 or older: $30,500
N/A

Different kinds of retirement plans

Once more, the totally different 401(okay) plans aren’t the one retirement choices you possibly can provide staff. You would possibly be capable to provide the next kinds of retirement plans:

To be taught extra about your retirement plan choices for your enterprise, head on over to the IRS’s web site.

This text has been up to date from its authentic publication date of Might 21, 2012.

This isn’t supposed as authorized recommendation; for extra data, please click on right here.



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