Non-Elective contributions and Matching Contributions

What is the difference between non-elective contributions and matching contributions to my employees’ 401k plan? How does either affect me, the employer? Richard E. Simpson, Brooklyn, NY owns a bookstore.

Learning the difference between non-elective contributions and employee match contributions is one of the most important first steps when you have decided to set up a 401k plan for your small business’ employees. These are the two ways in which you, the employer, can choose to make contributions to your employees’ retirement savings plan.

When you decide to contribute a percentage of every employee’s salary to his 401k, you are making a non elective contribution. For example, you may choose to make a non elective contribution of 30%, which means for every dollar from the employee you contribute an additional 30 cents. Remember that non-elective contributions have to be made to an eligible employee’s account even if he does not make any contribution from his side to the 401k.

A matching contribution is a better way to encourage employees to start saving for their future. Here, you contribute as much as your employee does to his 401k account. If your employee defers a specific amount from his salary into the retirement planning account, you match his contribution.

The IRS allows you to make both kinds of contributions simultaneously for your 401k plan too. Of course, you will need to read up on current tax law stipulations before you can determine exactly in what manner and how much to contribute. A traditional 401k plan can also be modified with respect to the amount that you will contribute as an employer. If your business is going through a bad patch you can minimize your contributions, if necessary.

Choosing an IRS compliant 401k suite like http://401keasyonline.com is a great advantage if you find it difficult to keep track of the various legal guidelines and regulations. Such a package keeps your 401k plan perfectly aligned with the currently applicable legalities.

Self Directed Brokerage Accounts

My employees want me to set up a 401k self directed brokerage account. What are the special advantages of such plans?- Edward L. Pittman, KensingtonKS runs a confectionary shop.

A Self Directed 401k plan gives the employee a great deal of control over his investments. Each of your employees is likely to have different investment objectives. An ideal 401k plan is one where each can decide where to invest and also manage investments individually. When you offer them a self directed 401k plan that has a whole host of low cost investments, retirement planning becomes easy for them. With such a plan every employee can optimally use the 401k plan to save the maximum amount in the investments that are best suited to his needs. This is probably why your employees want you to set up a self directed 401k brokerage account in your business.

You can open such an account with firms like Charles Schwab or Fidelity using a DIY software package like http://401k-easy.com. Such packages allow the employee to manage and track his retirement planning account on his own. This specific 401k plan lets your employees invest in several attractive investments other than those offered directly by Schwab.

For you, the employer, a self directed 401k plan is a good money saver. This is because you can process all the data pertaining to the plan within your organization. You avoid incurring the cost of hiring a plan administrator to take care of the plan’s assets and to manage the plan.

In addition, by offering a plan that gives employees this degree of control over their retirement saving, you can improve employee loyalty. A flexible 401k plan with a good choice of investments makes your business a desirable employer. This means that this plan will help attract the best talent in the market to your business.

Converting Your Existing Plan to a DIY 401k Software Suite

I set up a 401k plan for my small business a few years back. I am not satisfied with the investment options offered by my vendor. Can I change over to a DIY plan that gives me greater control? Glen N. Ethridge, New York, runs an office renovation business.

Sure, Glen, you can change over to a 401k plan that gives you greater control and better investment choices. In fact, if you sign up for a DIY package like http://401k-easy.com/, the conversion should not take more than a few days at best. Plus it is entirely free of cost. There may be many reasons for you to convert to a better plan that:

  • Offers more investment options
  • Is easier to track
  • Simple and quick to set up
  • Is cost effective
  • Can be used with ease by your employees

If you have made up your mind to change over to a DIY 401k plan then make sure all of the above are satisfied by your new one. Many small businesses save substantial sums of money (some businesses save up to 90%) every year simply by switching to an easy to administer and low cost plan like this one.

Another important feature to look for is whether the new plan still lets you go with your existing investment options. Although your new 401k may have a number of attractive no-load mutual funds on offer, some of your employees may want to stick to their existing investments. Your new plan should allow them to do so.

Also ensure that your new 401k suite makes the overall plan administration easy for you by automating many of the processes you are currently doing on your own. This lets you save much of the effort and time that a 401k plan usually requires you to invest.

100% Contributions with Solo 401k

I am a self employed fashion designer. I have independent income other than my earnings from my designing business because of which I can save 100% of these earnings. Can I contribute my entire earnings with a 401k plan? Vivian J. Maya, North Naples, FL, fashion designer.

If you set up a Solo 401k plan for your fashion designing business, you can save up to 100% of your earnings. The maximum limit for contributions with this kind of 401k plan is $49,000. The Solo 401k is a retirement benefit plan especially designed for self employed persons like you who want to maximize their savings in this plan.

This plan is very similar to the regular 401k but there are some special advantages (like the 100% salary contribution) that make it the ideal choice for the self employed. Borrowings are allowed from the Solo 401k up to a maximum limit of $50,000. You can take a loan of half your account balance in this account subject to this condition.

If you already have an IRA account or an existing 401k plan at your previous employer’s then you can roll the funds from these accounts over into your new Solo 401k plan. Once the transfer is complete, these funds can be utilized in the same manner as you would use your regular contributions to this plan.

A Solo 401k is not a great idea for a business that has employees. If you make maximum contributions to your Solo account you will also have to match the same for all your employees. This is one aspect to consider well before you set up a Solo 401k for your business, especially if you propose to add employees at a later stage. In such case, choose a software package like http://401k-easy.com that lets you switch from a one person plan to a regular plan with minimum hassle to set up your 401k plan.

Reduce Employee Turnover Rate with a 401k Plan

Will a 401k really help me reduce employee turnover and attract new employees? Does this result in cost savings for my business? Jean W. Jourdan, Syracuse, NY runs a glassware store.

Yes, you can definitely bring down your store’s employee turnover by offering an attractive qualified retirement benefit plan like a 401k. These plans make it easy for the employee to save for the future and bring some special benefits for them too. The tax advantages your employees will enjoy with these plans make them especially attractive.

Businesses that offer 401k plans are viewed as good employers by potential employees. Such plans show that the employer is concerned about the welfare of his staff. An employer contribution makes a 401k plan even better because, for the employee, it is essentially ‘free money’. For you, the employer, a contribution match is a great way to encourage participation from your employees’ side. Remember that your contributions give you tax benefits too. Clearly, if your business has a 401k plan for employees you can attract the best talent in the market and retain existing employees quite easily.

Studies show that replacing an employee costs anywhere between 26% to 49% of his annual salary. This means that even by preventing one employee replacement your business stands to save a substantial sum of money. Set up a 401k plan for your business as the first step in reducing employee turnover. It is also important to make sure that you have the right kind of investment products on offer with your 401k plan. Your plan should be easy to operate and manage so that your employee can track his retirement savings with perfect ease. The best way to meet all these objectives is to choose a DIY software package like http://401keasy.com/ to set up, manage and update your business’ 401k plan.

About SIMPLE 401ks

I run a graphics business with 80 employees. Is my business too big for a SIMPLE 401k?- Jeremy Grahams, Maine.

The SIMPLE 401k plan is a great retirement savings plan for employees. This plan was established for small businesses that employ up to 100 employees. So you can definitely set up a SIMPLE 401k for your graphics firm. The employees who will participate in this plan should have earned at least $5,000 in the previous year. Plus they cannot be participants to any other retirement plan offered by you.

The employer’s contribution with a SIMPLE plan is a dollar for dollar match up to 3% of the employee’s salary. The best part for your employee about this plan is that even if he makes zero contributions in a year, you still have to make a 2% employer’s contribution. This is the non-elective contribution made to this plan.

Another advantage of the SIMPLE 401k to your employee is that your contributions are immediately vested. These attractive employee benefits make it easy for you to ensure full employee participation in your 401k plan. In addition, by offering a good retirement benefit plan like the SIMPLE 401k you make your business highly attractive to the best talent in the market.

The SIMPLE plan does not require the mandatory testing that the law requires you, the employer, to undertake for regular 401k plans. This lets you save quite a nice sum that you would otherwise have paid for this process.

If you want to set up a SIMPLE plan for your business with the least hassle then choose a DIY 401k suite like http://401keasy.com/. Such software packages make it easy for you to set up, administer and track the 401k plan. Many businesses prefer to use such packages because it makes the periodic updating process on payday easy and hassle free.

Hardship Withdrawal from 401k

My employee wants to take a hardship withdrawal from his 401k account. Are such withdrawals allowed and what should I know about them?- James Gallagher from Covington, Kentucky runs a sports outfits retail store.

Your employees can make a withdrawal from their 401k accounts if they have an ‘immediate and heavy’ financial need. In fact, this is one of the biggest benefits they derive from participating in a qualified retirement benefit plan like the 401k. The savings they have in the plan act as their financial back up plan when they need emergency funds. Here is what you, as the employer, should know about such ‘hardship withdrawals’.

The employee needs your approval to take the funds out from his 401k account. You can ask him to provide documentary evidence to prove his financial need. Generally, withdrawals are allowed if they will be used to meet expenses related to:

  • Home purchase (if it is the employee’s first home)
  • Higher education for the employee’s family member
  • To pay off debts that will help prevent eviction proceedings
  • Tax deductible medical costs that he cannot pay from any other source

Remember that the withdrawal amount should be sufficient to satisfy the financial need. It should neither be substantially larger than the need nor significantly smaller. Another important point to know is that a withdrawal cannot be repaid like a 401k loan. The 10% penalty will apply on these funds and the employee will also have to pay tax on them.

Keep track of your employee’s withdrawals by updating his records as soon as the funds have been disbursed from his account. If you are using a DIY 401k package like http://401keasy.com/, you can do this quickly and easily.