4 Different 401k Plans For Businesses

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401k Plans For Businesses

business 401k plan options401k 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.

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