401(k) Design Alternatives, 401(k) Selections

401(k) design alternatives and 401(k) selections from them should be analyzed when establishing a plan and monitored periodically.

401(k) Design of Participation Requirements

401(k) waiting period alternatives: A 401(k) plan may allow immediate entry or require a waiting period of up to one year (effectively 18 months) for both employee and employer contributions.

401(k) selection from alternatives: Although delaying participation may reduce costs, it will make the 401(k) plan less attractive to prospective employees. Recent favorable changes in the law encourage employers to select shorter eligibility requirements. If the company does not wish to cover part-time employees, a one year eligibility period with completion of 1000 "hours of service" may be needed, since a shorter period cannot require a minimum number of hours of service.

401(k) dual eligibility alternatives for current and future employees: Allowing those employed when the 401(k) plan is established to participate immediately, but requiring a waiting period for future employees, is not uncommon.

401(k) selection from alternatives: 401(k) arrangements frequently allow all employees present at the plan's inception to participate. Since many of them may likely have already met the plan's eligibility requirements anyway, the additional cost to provide this benefit is frequently small.

401(k) dual eligibility requirement alternatives for employee deferral and employer matching contributions: Different eligibility requirements may be selected for employee deferral and employer matching contributions. Allowing immediate entry or a short waiting period for employee deferrals, while requiring a period of up to one year to for employees to receive employer matching contributions, may be desirable.

401(k) selection from alternatives: Recent favorable changes in the pension laws encourage employers to adopt this 401(k) option since it is highly appreciated by new employees. It frequently adds little or no cost to the plan, other than a small additional administrative expense.

401(k) Design of Employer Matching Contributions

401(k) basic matching alternatives: An employer can choose to provide no match, a discretionary one or a fixed match..

401(k) selection from alternatives: When concerns about employer costs are critical, no match or a discretionary one may be advisable. Since a matching contribution may increase employee participation and 401(k) deferrals, motivate employees to save for retirement and help reduce employer contributions needed to pass the "nondiscrimination tests," adopting a matching contribution is frequently advantageous. For organizations desiring to avoid the requirements of the discrimination tests, adopting a "safe-harbor" 401(k) plan may be advisable; however, these plans require a minimum statutory match or a nonelective profit sharing contribution with immediate vesting

401(k) matching amount alternatives: A common employer match is 50% of 401(k) employee deferrals, based on a maximum deferral rate of 6% of compensation. However, it is important to select a matching contribution that conforms to the particular needs of the employer.

401(k) selection from alternatives: Many experts advise beginning with no match or a small one since it can easily be increased but may be difficult to reduce. When determining the matching formula, an employer should always calculate its expected cost and the anticipated effect it will have in attracting and retaining valuable employees. The employer should also consider the match offered by its competitors and the likely effects of the proposed match on passing the 401(k) nondiscrimination tests.

401(k) matching frequency alternatives: Most organizations contribute the match with each payroll, while others provide it once at year's end.

401(k) selection from alternatives: The more frequently the employer matches 401(k) employee deferrals, the more likely increased employee participation in the 401(k) plan will occur. Smaller employers may prefer to match at year's end to reduce employer administrative costs. Employers may also prefer to make a discretionary match at year's end.

401(k) matching allocation alternatives: Employer matching contributions may be made to all those who make deferrals or restricted to those who complete more than 1000 hours of service in a year or are employed at year's end.

401(k) selection from alternatives: Restricting the allocation of the match may result in the plan's failure to satisfy the coverage requirements regarding "non-highly compensated" employees..

401(k) Design of Employer Vesting Requirements

401(k) basic vesting alternatives: An employer must meet certain minimum statutory vesting requirements but may select a more liberal vesting schedule. For plans that are "top-heavy", the law requires minimum vesting of 20% a year starting with the second year or 100% cliff vesting after three years. Plans that are not top-heavy require slightly more liberal vesting schedules. A participant is always 100% vested in his own contributions and at his normal retirement age.

401(k) selection from alternatives: When employer concerns about costs are crucial, adopting a schedule that only provides the minimum legal requirements may be advisable. However, this may cause the plan to be less attractive to employees and, if employee turnover is low, the savings may be relatively modest.

401(k) additional vesting schedule alternatives: Any schedule that provides vesting at least equal to the minimum statutory vesting requirements may be chosen.

401(k) selection from alternatives: Amending a liberal vesting schedule may be difficult. When selecting a schedule, the expected cost of various ones should be compared. The employer should also consider schedules offered by its competitors and the likely effects adopting different vesting schedules will have on employee participation.

401(k) Vesting Years of Service: When determining which "years of service" are counted for vesting purposes, an employer may exclude years before the current or a prior plan's inception and those before an employee has attained age 18.

401(k) selection from alternatives: These years are frequently not excluded because of the relatively small cost savings that would result and the perception by employees that such an exclusion would be unfair.

401(k) Further Assistance

If you are considering or already have a 401(k) plan and have questions about its design or need assistance, please complete our short form. We will provide some suggestions, without obligation. If you prefer, contact us at 718-793-9885. Our web site home page contains additional useful information about 401(k) plans.


| Home | Information | Applications | Assistance | Contact Us |