Journal Article

401(k) Plans: Make 401(k) Easy on Yourself

Murphy, Michelle G

2023

Overview

While there are certainly times where it may make sense to create a longer eligibility requirement for a profit-sharing contribution over a shorter salary deferral and match requirement, it may be that contribution formulas could accommodate a similar end goal without adding multiple eligibility requirements. Whether the standard match or non-elective formula is used in plan design is generally dependent on whether profit sharing contributions are intended, or even whether a cash balance plan has layered on top of the 401(k) plan, which usually would make a non-elective formula most efficient. By auto-enrolling at 10 percent of pay, the employer can avoid auto-escalation, use a 3.5 percent match rather than the standard safe harbor 4 percent minimum, and satisfy multiple nondiscrimination tests. If employees were permitted to participate in the plan immediately or at 90 days (where many health and welfare plans are enrolled), and gross compensation is used for contribution calculations, the 401(k) plan would operate with relative ease and possibly have a lower cost than a standard safe harbor match plan, depending on participation.

• Publisher: Aspen Publishers, Inc
• Subject: Compensation / Deferred compensation / Eligibility / Employees / Safe harbor / Wages & salaries