Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK 

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass theIRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then aSafeHarbor401k is the right 401k plan for your business.SafeHarborplans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing aSafeHarbor plan.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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