In today's world few employers can successfully compete in the labor marketplace without maintaining a comprehensive employee benefit program. A major component of such a program must be one or more qualified retirement plans.
These plans allow pre-tax employee contributions, with or without matching employer contributions. The annual individual savings deferral is limited by law to $10,000 for the calendar year 1999. This amount may be increased by the government each year for cost of living adjustments.
The IRS has made available a number of different 401(k) plans. The traditional 401(k) plan is subject to numerous nondiscrimination tests that effectively limit the amount of money that can be contributed to the plan for owners and other highly compensated employees.
Beginning in 1997, the IRS introduced two additional plan designs, aimed at loosening the structure of the traditional plans. However, the lifting of restrictions comes with a price. This brochure provides a comparison of the traditional 401(k) with the newer SIMPLE 401(k) and Safe Harbor 401(k) plan designs.
| Traditional 401(k)s | |
| AVAILABLE | Original 401(k) plan |
| DEFERRAL LIMIT | $10,000 Indexed Subject to rules |
| RULES | Must pass all non-discrimination rules. Generally, the ADP test limits highly compensated employees to a deferral of no more than 2% more than the average non-highly compensated employee. |
| REQUIRED CONTRIBUTION | None |
| VESTING | Allowed up to 7 years |
| FLEXIBILITY | May define match and or profit sharing contributions at anytime |
| Safe Harbor 401(k) Plans | |
| AVAILABLE | Beginning January 1, 1999 |
| DEFERRAL LIMIT | $10,000 Indexed Subject to limited rules |
| RULES | Must pass limited non-discrimination rules ADP and ACP tests eliminated |
| REQUIRED CONTRIBUTION | Match of 100% up to 3% plus 50% from 3% to 5% or Contribute 3% for all eligible participants |
| VESTING | 100% Immediate |
| FLEXIBILITY | Limited - must communicate required contribution method prior to the start of each plan year. Enhanced contributions are allowed and may be made subject to vesting. |
| Simple 401(k)s | |
| AVAILABLE | Beginning January 1, 1997 |
| DEFERRAL LIMIT | $6,000 Indexed Subject to limited rules |
| RULES | Must pass limited non-discrimination rules ADP/ACP tests eliminated |
| REQUIRED CONTRIBUTION | Match of 100% of first 3% Or Contribute 2% to all eligible participants |
| VESTING | 100% Immediate |
| FLEXIBILITY | Limited - must communicate required contribution method prior to the start of plan year. No other contribution allowed. |