Plan Design
Retirement Plan Design
401(k) and 403(b) plan design refer to how your plan is tailored and what features they include. When you sponsor a new retirement plan or make changes to your organization’s existing plan, you have the opportunity to design a plan that works for your organization. Basically, there are six major plan design features – eligibility, compensation, contributions, vesting, withdrawals, and loans. A quality retirement plan expert will take the time to understand your needs and walk you through the process – answering any questions you might have about your options and helping you choose the best features based on your organization’s goals and budget.
1. Plan Eligibility
Plan eligibility refers to when a new employee can start participating into the plan. Businesses and organizations can allow a new hire to take part in the plan right away or can impose minimum service or age restrictions. They can also choose special enrollment dates, from right away to semi-annual entries. Want to exclude certain employees from the plan? That’s possible assuming the IRS-required coverage testing is satisfied. You can statutorily exclude certain other employees, such as collectively bargained and non-resident alien employees.
2. Plan Compensation
Two widely used compensation types are W-2 and IRS 415. Although they typically include all salary paid to the employee, you can choose to exclude certain types of compensation, such as bonus and overtime. These exclusions require additional non-discrimination testing, however.
3. Employee And Employer Contributions
Your staff can defer pre-tax or Roth after-tax contributions (if Roth allowed by your plan). You may also choose to implement automatic enrollment provision that sets a default contribution amount for employees who don’t either contribute to the plan or choose to contribute a different amount.
As for employer contributions, you can tailor your plan according to your goals and budgetary considerations. Your plan can provide a matching contribution based on the elective deferrals made by plan participants. The matching formula can be fixed or completely discretionary, allowing your organization to determine the rate of the match each year. The plan can also provide profit sharing contribution, which allows the organization the flexibility to contribute or not contribute depending on profitability. Other options include Safe Harbor 3% non-elective or matching, both of which must be fully vested.
4. Vesting
While 401(k) and 403(b) employee contributions and Safe Harbor contributions must be statutorily 100% vested, you can designate a vesting schedule on discretionary matching and discretionary profit sharing contributions. Some common vesting schedule are 3-year cliff (1-2 years = 0%, 3 years = 100%) and 6-year graded (20% each year after 2 years). When a participant leaves the organization, he is entitled to only the vested portion of his account balance depending on the years of service completed. What about the unvested portion, if any? It must be forfeited to the plan. The plan can apply this forfeiture money to pay plan fees or reduce employer contributions, or both.
5. Withdrawals
With certain exceptions, you can control how and when participants can take distributions from the plan. When a participant terminates employment, he must be afforded the opportunity to either take a cash distribution (taxes apply) or alternatively rollover the savings into a new 401(k) or IRA. Your plan is not required to but can (and most plans do) allow in-service distributions at age 59-1/2 or hardship distributions if certain conditions are met.
6. Loans
You can choose whether or not to allow loans through your business organization’s plan. If you do allow it (most organizations do), part of your plan document will outline exactly how loans work, including how much of an employee’s balance they will be able to take out as a loan, what repayment schedules look like, and how much interest an employee will repay as part of the loan agreement.
As you can see, there are many aspects to consider when designing or redesigning a 401(k) or 403(b) plan. As such, it is ideal to work with an expert and consider options that work for your organization.
Find the Right Plan for Your Business or Nonprofit
NESA Plan Consultants (NESA) is a retirement plan provider working with advisors, recordkeepers and CPAs to offer customized 401(k), 403(b) and 457(b) plans. NESA offers modern solutions and provides resources to employers and employees to secure a brighter financial future.