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401(k) Plans

Client Centered

With a 401(k) plan, employees can choose to defer some of their salary. Instead of receiving that amount in their paycheck, the employee defers, or delays, getting that money. In this case, their deferred money is going into a 401(k) plan sponsored by their employer.  This deferred money generally is not taxed until it is distributed.

If you establish a 401(k) plan, you:

  • Can have other retirement plans
  • Can be a business of any size
  • May need to annually file a Form 5500

Traditional 401(k) vs Roth 401(k)
We can design your 401(k) Plan for both Traditional 401(k) contributions, as well as Roth 401(k) contributions. Traditional 401(k) contributions enable you to defer taxes today, while Roth 401(k) contributions enable you to pay taxes now and enjoy tax-free growth for the future.

Safe Harbor vs Profit Sharing
A safe harbor plan is a type of 401(k) that ensures all eligible employees receive a company contribution (like a company match). Unlike a traditional 401(k), a safe harbor plan doesn’t require business owners to perform annual nondiscrimination testing. If a plan includes the following safe harbor provisions, it automatically passes non-discrimination tests. A Profit Sharing plan is a type of plan that gives employers flexibility in designing key features. It allows [the employer] to choose how much to contribute to the plan (out of profits or otherwise) each year, including making no contribution for the year. 

A minimum safe harbor contribution to employees is typically 3% Safe Harbor Non-elective contribution to every employee or a 4% Safe Harbor Match.
Vesting of employer safe harbor contributions is immediate. While a profit sharing plan provides for a discretionary match that can be subject to vesting, it is subject to plan testing, which may have higher administrative costs.

Contribution limits
The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000 for 2024.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan remains $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan who are 50 and older can contribute up to $30,500, starting in 2024. 

After Tax 401(k) & The Mega Roth Strategy
We can design a plan to allow for After-Tax 401(k) contributions, which enable employers and employees to contribute the IRS maximum of $69,000 for those under 50 years old. (Those 50 and older may contribute an additional $7,500). While the After Tax contributions would be tax free upon withdrawal, the earnings would be taxed. Therefore, converting the After Tax contributions to Roth is how we achieve the Mega Roth Strategy.

In-Plan Roth Conversion 
It is important to design a plan with an in-plan Roth conversion featuring which allows you to take after-tax contributions and convert them to Roth. Some plan are able to offer an auto-convert feature inside the plan. You can set it up so that any after-tax contributions are automatically converted to a Roth at regular intervals. Though after-tax contributions have already been taxed, any earnings associated with them have not. Converting earnings will trigger a tax bill in the year of the conversion.

Pros and cons of 401(k) Plans
Greater flexibility in contributions
Employees may contribute more to this plan than under IRA plans
Good plan if cash flow is an issue
Optional participant loans and hardship withdrawals add flexibility for employees
Administrative costs may be higher than under more basic arrangements
Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.
Additional withdrawal and loan flexibility adds administrative burden for the employer.

Who contributes
Employee salary deferrals and/or Employer contributions.  Employees are always 100% vested in their salary deferrals. Employer contributions may be vested on a graduated vesting schedule.

Filing requirements
Annual filing of Form 5500 is required for 

Participant loans
Permitted.

In-service withdrawals
Yes, but subject to possible 10% additional tax if under age 59-1/2.