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401(k) Traditional Plans

The first option usually considered by employers is a standard 401(k) Plan. Such plans can be structured either with or without a “matching” employer contribution feature. In addition, such matching contributions can either be mandatory or discretionary, depending upon the employer’s preference. These 401(k) Traditional Plans provide an excellent opportunity for those employees who want to take some initiative towards saving for their own retirement. The main drawback of such plans is usually that many employers find them too restrictive by limiting the amount that owners and highly compensated employees (those making over $105,000) can contribute due to required actual deferral percentage (ADP) testing each year. (Such ADP testing is designed to ensure that highly compensated employees do not contribute at a significantly higher percentage than do other non-highly compensated employees.)

Another plan feature normally paired with a 401(k) Traditional or Safe Harbor Plan is the ability for the employer to make a discretionary profit sharing contribution each year. This is a very popular type of plan due to its flexibility, since the employer has total control over when and how much to contribute. The typical allocation method is generally a pro rata calculation based upon each employee’s compensation for that plan year. (Other permissible allocation method options, discussed below, are integrated compensation formulas, age-weighted formulas, or cross-tested designs.)

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:22 PM

 

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