How new rules help biz owners control employees 401(k)s

By Chris Freeburn

Helping your employees save for retirement is not merely an altruistic gesture on your part. There are huge benefits for you as an employer, and for your business as a whole. In today's increasingly competitive marketplace, businesses small and large are competing for highly skilled employees-and the competition is only getting more intense. Today's highly talented job applicants are looking for more than a good salary. They are seeking the kind of perks that provide financial security for themselves and their families in the long run.



Employers have a variety of options to choose from when deciding what sort of retirement plan to offer. By far, the most popular type of plan-both among employers and employees-is the 401(k). According to the Internal Revenue Service, more than 44 million American workers currently participate in 401(k) plans with a total investment of over $2.5 trillion.


A 401(k) is a "defined contribution" plan, as elaborated by the Internal Revenue Code, meaning that an employee elects to have a specified portion of his or her pre-tax wages directly contributed to the plan. Employee contributions are usually invested in mutual funds. Some employers offer matching contributions to part of or all of an employee's 401(k) plan contributions. Offering a 401(k) retirement plan will attract a better pool of job applicants to your company and help keep them there for the long term. Recent changes in federal tax law has made setting up 401(k) retirement plans much easier for small businesses, and increased the amount of money employees can save.


A variety of options


There are three basic types of 401(k) plan that businesses can offer to their employees:


  • Traditional 401(k): The most flexible type of 401(k) plan allows businesses to decide whether to make contributions to the plan for all participating employees, match employee contributions, or do both. Contributions can be made through payroll deductions. Traditional 401(k)s offer employers an advantage. Employer contributions to an employee's account are not fully "vested" at the time they are made, however. That means that an employer can create a specified time frame called a vesting schedule-usually several months-before any matching contributions to the employee's account become non-forfeitable by the employee. This means that if an employee leaves the firm, any matching contributions to his account made during the vesting period before his departure can be reclaimed by the employer. The IRS also demands that traditional IRA's conform to complicated "discrimination" tests, which compare compensation rates among plan participants. For additional and complete information on 401(k) plans, please visit

  • Safe Harbor 401(k): Under this type of 401(k) plan employers can contribute either matching or non-elective amounts to the plan for eligible participants. These employer contributions remain tax deductible and employee contributions are tax deductible as well. Unlike a traditional 401(k), all employer contributions are fully vested when made. The primary benefit of "Safe Harbor 401(k) plans" is that they are not subject to the discrimination testing that applies to traditional 401(k) plans. Safe Harbor plans are usually chosen by small businesses with several highly compensated owners/employees whose contributions to the 401(k) plan would be significantly disproportionate to other, lower paid employees.

  • Simple 401(k) Plans: These plans allow small businesses to adopt the basic features of a traditional 401(k) plan without the non-discrimination testing. Simple 401(k) plans are available to companies with 100 or fewer employees who receive a minimum of $5,000 in annual compensation. Participants in a Simple 401(k) plan may not receive benefits from any other retirement plan offered by the employer. While Simple 401(k) plans avoid the costly testing required by traditional 401(k) plans, they are permitted significantly lower salary deferment limits-$5,000 less per year than traditional 401(k)s. All employer contributions are fully vested when made.

Setting up a 401(k) plan has become a relatively easy affair for qualifying small businesses. Many major financial institutions have created programs that walk a small business through the plan setup and administration process. Setup fees for these programs are often under $5,000.


Increased employer control


In 2007, the federal government approved new rules that gave employers increased control over their 401(k) plans. Under the new rules, it is easier for employers to automatically enroll employees into the 401(k) plan. Employees still have the right to "opt out" of the plans, but most don't. Employers may now also exercise greater control over the mix of investments in which automatically enrolled 401(k) participants have their money invested. Before the rules change, automatically enrolled participants' funds were only to be invested in vehicles like money markets, which were guaranteed not to lose money. Under the new rules, if automatically enrolled employees do not select investment vehicles for their funds on their own, the employer and plan administrator can choose to invest their money in a mix of stocks, mutual funds or fixed income investments as they see fit.