401(k) Plans

As you’re probably well aware, the 401(k) is an extremely popular type of defined contribution plan.

Employers who adopt a 401(k) plan are generally required to file an annual return (Form 5500) with the federal government.  While third-party administrators will often assist in the preparation of this return, it is a good example of the additional administrative burden/cost that typically comes along with a Qualified Plan such as a 401(k) (as compared with IRA-Based Plans which do not require the filing of an annual return such as the 5500).

One of the key features that makes the 401(k) plan so popular with employers and employees alike is the funding flexibility.  Most 401(k) plans will provide the sponsoring employer with a variety of funding options including employee deferrals, employer profit sharing and/or matching contributions, etc.

Another key benefit of 401(k)  is the funding limit for 401(k) plans (for any one participant) is considerably higher than other plans.  Keep in mind that just because the 401(k) plan allows for a maximum contribution of $53,000 ($59,000 if you’re age 50 or older), this does not automatically mean that the business owners and/or company executives will automatically be able to achieve these levels.  In the end, you should look at your personal allocation goals and then explore what type of plan design will best enable you to cost effectively meet your personal retirement savings objectives as well as the broader company-wide objectives for sponsoring the plan.

Feature

Summary

Details

Employer Eligibility

Few Restrictions

No size restrictions

Maximum Age Restriction

Age 21

May exclude employees under age 21

Maximum Service Restriction

1 Year of Service

May exclude employees with less than 1 year of service

Annual Notifications/Reporting

Form 5500

Employer must file Form 5500 annually with IRS/DOL

Funding Options

Employer and Employee

Allows for both employer contributions and employee deferrals

Maximum Contribution (2016)

$53,000

$59,000 (age 50+)

Ability to reach maximum allocation depends on a variety of factors

Special Features

Considerable Plan Design Flexibility

Flexibility can vary widely between providers

Withdrawal Restrictions

Yes

Typically not distributable prior to death, disability. separation from service or plan termination