Q: Should I select an individually-designed plan or a prototype?
A: That depends. If you want an easily-administered 401k plan, a prototype may suffice. If you want to accommodate more of your needs, you probably want an individually-designed document. Note that many service 401k providers which offer a complete or "bundled" approach do not permit individually-designed documents. Their 401k prototypes may be severely limited and they may not facilitate submission to the IRS for plan approval.
Q: When should I allow employees to qualify for entry into the 401k plan?
A: When selecting eligibility requirements, the employer should consider that although a delay in participation may reduce employer costs, it will make the plan less attractive to prospective employees. Recent favorable changes in the laws are encouraging more employers to opt for allowing immediate eligibility.
Q: Should I have an employer matching contribution? If so, how should I design it?
A: Selecting an appropriate matching contribution depends upon many considerations. Many 401k experts advise starting with no match or a low one, since it can always be increased but may be difficult to reduce. However, since a match can be used to motivate potential and current employees and increase employee participation and appreciation of the 401k plan as well as help reduce employer contributions needed to pass the ADP/ACP tests, a match should be seriously considered when establishing the 401k plan.
Q: Should I use a vesting schedule or vest 100% upon plan entry?
A: 100% vesting upon plan entry creates additional employee appreciation of the 401k plan and prevents resentment arising from employees' lack of entitlement to employer contributions already made on their behalf. If there is high turnover, using a vesting schedule may significantly lessen employer 401k costs since non-vested amounts are forfeited when employees terminate service.
Q: Should I allow provisions for hardships or loans?
Since the laws governing hardship distributions are complex and a violation can result in plan disqualification, an employer may not want to include a hardship provision in the 401k plan despite employee pressure. However, these options are common and can contribute substantially to the plan's success. Loan provisions are more widespread than hardship ones and are often provided to encourage employee participation and appreciation of the 401k plan.
If you have 401k questions or need assistance, please complete our short form. We will reply promptly to concerns of employers and their representatives. Or call us at 718-793-9885. Our web site home page contains additional useful information about 401k plans.