More about Hardship Withdrawals

Should I allow a hardship withdrawal provision for my small business 401k? Can my employees withdraw funds from their 401k interim even if I do not specifically allow hardship withdrawals for the plan? Lisa C. Page, Providence, RI 02908

You definitely need to expressly allow hardship withdrawals for your employees to be able to withdraw funds in this way. If your plan document does not clearly state that such withdrawals are possible, your employees cannot use their 401k funds to meet financial emergencies. TheIRSleaves it entirely to your discretion whether you want to include this option in your plan or not.

Enabling such withdrawals makes it possible for employees to meet non reimbursable medical expenses that are due, buy their first home, pay off debts to avoid foreclosure or eviction or pay for a family member’s education. In fact, the funds in your employee’s 401k account can be used for such purposes for a spouse or dependent child too. It is a wonderful financial backup in event of a financial emergency. Your employees will surely appreciate if you do have a provision for hardship withdrawals included in your 401k plan documents.

Keeping track of such withdrawals is very critical because the employee who withdraws in this manner needs to adhere to certain conditions. For instance, if he is not over 59 ½ years old, he is liable to pay a 10% penalty from the withdrawal amount. Plus, the employee cannot contribute to the 401k for the following six months. Unless you are using a DIY software suite like to manage your 401k, tracking withdrawals can pose problems.

Remember that the withdrawal is not a loan from the 401k and cannot be paid back. Make sure that your employees know that any withdrawals will permanently reduce their 401k balance. This should help them objectively decide when they should resort to this provision.

Information that Helps You Choose the Right Employee Benefit Plan

What kind of information should I give my investment advisor when discussing setting up a retirement plan for my small business? I think a 401K plan is the best option. Do I still need to talk to my advisor?– Marylou Saver, Atlantic Beach, Florida runs a party decorating service.

Choosing the employee benefit plan or retirement plan that you should set up for your business can be a tedious, time consuming and, above all, very confusing task. Even if you do hire an investment advisor to help you with this task, there is still some analyzing and comparing for you to do. The advisor may ask for some details about your business that will help determine the kind of plan that will suit your needs perfectly. Remember that even if you have decided on a 401K plan, your advisor may be able to help decide exactly which kind (Solo 401K,SafeHarbor401K, Roth 401K etc) will suit you. Here is some of the information you should have at hand before you sit down to discussing the kind of retirement benefit plan your business should offer employees.

The first point to consider is your contribution. How much can your business afford to contribute to the employee 401Ks? What kind can you afford- a regular monthly contribution or a non specified profit sharing contribution? Given that the total contribution outlay for the business will depend on the number of employees and their eligibility to the plan, these employee details will also be needed by the advisor.

Unless you are discussing the plan with the third party agency that will set up the 401K for you, it is also worthwhile discussing DIY software suites like These suites let you manage your 401K on your own with ease. This helps keeps the costs down while giving you and your employees a great deal of control over the plan assets.

Comparing 401Ks with Other Small Business Employee Benefit Plans

I know that there are many employee benefit plans that I can choose to set up for my business. Why am I always recommended a 401K over the others?- Jason Bartholomew, Delaware, owns a café.

There are different options available to employers like you who are looking to make retired life easier for their employees by setting up an employee benefit plan for them. Although there are other plans, the SEP IRA and the 401K are the most popular ones. Your financial advisor is right in recommending that you establish a 401K plan instead of a SEP IRA because there are some special advantages this plan has to offer.

The first and most important one is that the 401K plan is a great way to encourage employees to save for their own future. Employee contributions are deducted directly from their paycheck even before they are paid. You can choose to match their contributions to boost employee morale and loyalty. In effect, your 401K plan puts the employee’s retirement planning firmly in his hands with help from you in the form of contribution matches. When you use an easy to operate software suite like to manage the 401K, the employee can stay updated with his retirement planning account at all times. With a SEP IRA, only you, the employer, make the contributions. When your employee quits working for you, he/ she can simply walk away with the money in the IRA account.

Another important advantage of 401Ks is that you can opt for a vesting schedule so that only employees who have been with your company for a while can withdraw your contributions. This ensures that you are rewarding only those employees who have really contributed to your business.