401k plans are used by businesses to attract and retain employees.
The tax benefits, the employer matching option and portability of 401k plans make them a valuable tool for businesses.
In today’s market place, there are several types of 401k plans available. Which 401k plan a business implements depends on the size of the business and the type of benefits they want to offer their employees.
A business 401k can be: a Roth 401k, Self Directed 401k, Safe Harbor 401k, or a Simple 401k , sometimes called the small business 401k.
4 Different 401k Plan Options:
#1 – Roth 401k Plan:
- Tax advantages.
- Contributions made with after-tax dollars.
- The account grows tax deferred and tax-free.
- You need to start distributions from your Roth 401k account by 70 1/2.
- No taxes at time of distribution or withdrawal.
- To avoid paying taxes when you make your withdrawals, you must be over 59 1/2 and your Roth 401k account must be at least 5 years old.
- If you receive the employer matching, you will have to pay taxes on that matching amount at the time of distribution/withdrawal.
- Same funding options as a Traditional 401k: core group of funds that must be diversified.
- For 2010, the maximum Roth 401k contribution limit is $16,500.
- For 2010, the catch-up contribution limit is $5,500.
Traditional 401k Plan:
- A core group of mutual funds are the investment options.
- This core group has to provide diversification for plan participants.
- Diversification: offer 401k funds from each asset class.
- Cash, stocks and bonds are the 3 asset classes.
- Employer matching can be offered.
- The matching can be subject to a vesting schedule; that is the employer’s decision.
- Pre-tax contributions are made by employees through payroll deductions.
- Employee’s contributions are immediately 100% vested.
- The employer match can be set up to a vesting schedule.
- A vesting schedule has the employee’s receiving the employers match over time.
- For 2010, the maximum contribution limit is $16,500.
- For 2010, the catch-up contribution limit is $5,500.
Safe Harbor 401k Plan:
- The Safe Harbor 401k plan rules are similar the Traditional 401k except in the matching rules.
- Employer matching contributions are always 100% vested.
- The employer match is not subject to a vesting schedule, like in a Traditional 401k plan.
- The employer can match each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation and 50 cents on the dollar for the employee’s contribution that exceeds 3%, but not 5% of the employee’s compensation.
- For 2010, the maximum contribution limit is $16,500.
- For 2010, the catch-up contribution limit is $5,500.
Self Directed 401k Plan:
- The Self Directed 401k plan rules are similar to the Traditional 401k except in the brokerage option.
- With a Self Directed 401k, plan participants also have access to a brokerage account.
- This brokerage options gives the participants a much larger selection of mutual funds to choose from.
- A self-directed 401k is available in the plan only if approved by the plan sponsor.
- The 401k plan sponsor does not select the funds used on the self-directed side, the individual investor makes those selections.
- For 2010, the maximum contribution limit is $16,500.
- For 2010, the catch-up contribution limit is $5,500.
SIMPLE 401k plan:
- Sometimes called a small business 401k.
- The tax rules would only benefit small businesses.
- A simple 401k plan can only be used at companies with 100 or fewer employees.
- Employers matching contributions are always 100% vested.
- Employer matching can be a dollar for dollar match up to 3% of the employee’s compensation.
- For 2010, the maximum contribution limit is $16,500.
- For 2010, the catch-up contribution limit is $5,500.
Since there are so many 401k plan options available, be sure to do your research on which one best fits the short and long-term needs of the organization.