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Customize Your 401(k) Plan
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Customize Your 401(k) Plan
Nearly a quarter (24%) of small businesses today offer 401(k) plans to enable their employees to save for retirement, and the number is growing, according to a *ShareBuilder national survey. You don’t need a staff in order to have a 401(k) plan for yourself; self-employed individuals working alone can have what’s called a solo 401(k). The plans may have certain features prized by owners and participants. The law does not require all plans to have them; it’s up to the business to decide whether they should be included. Here are some options that you can add to your plan this year.
You can allow participants to borrow from their accounts. The tax law limits the extent of borrowing to the lesser of 50% of vested benefits or $50,000. For most loans, funds have to be repaid in level amounts over a period no greater than five years, with a reasonable rate of interest.
If the plan allows it, owners are permitted to borrow from their accounts. They can use the funds to help with cash flow or for other purposes. “Key employees,” which includes owners, cannot deduct interest on the borrowing. Find more details about plan loans from the IRS.
Designated Roth accounts
Contributions to a 401(k) by participants are made on a pre-tax basis; the portion of salary added to the plan is not currently taxable. The contributions as well as the earnings on them become taxable when funds from the 401(k) are distributed to participants. However, the plan is allowed to include a Roth component, called a designated Roth account. Here, employee contributions are made on an after-tax basis but distributions can become fully tax free.
Contributions to designated Roth accounts are made only by participants. Total contributions to both the regular and Roth 401(k) are capped annually. No employer contributions can be made to these accounts.
Find more details about designated Roth accounts from the IRS.
Like traditional IRAs that can be converted to Roth IRAs, basic 401(k)s can allow for conversions by participants to designated Roth accounts. These are called in-plan rollovers.
From the employee perspective, amounts transferred to the designated Roth accounts are immediately taxable. However, there is no 10% early distribution penalty for employees under age 59-1/2 who make in-plan rollovers. Once the conversion is made, it cannot be undone.
From the employer perspective, the frequency of these conversions can be limited (e.g., one a year). The plan can also cap the dollar amounts that can be converted to designated Roth IRAs. The 20% mandatory withholding on 401(k) plan distributions does not apply to in-plan rollovers.
If you want to add an in-plan rollover option, generally you must amend the plan no later than the last day of the plan year in which the option becomes effective. The IRS has provided more guidance on in-plan rollovers.
Note: If your plan is a safe harbor 401(k) in which employees are automatically enrolled unless they opt out or choose a lower contribution amount than automatically specified, normally you cannot make a change—even a favorable one—during the year. However, under a special rule, you can make a mid-year change to add the in-plan rollover option in 2014.
More investment options
Plans are required to offer a menu of investment options from which participants can select for their own accounts. The minimum number of options is three, each of which is a distinct type of investment (e.g., a money market fund, a stock fund, and a bond fund), although some plans may have as many as 100 choices. According to FINRA, the average is 10 choices.
Review your plan’s investment options to see whether changes are warranted, factoring in the fees related to these options. For example, you may want to add new choices to your existing menu of investment options. Be sure to provide required disclosure to participants about fees associated with these investment options.
Talk with a benefits expert to learn more about these and other plan options that you can use to customize your 401(k) plan. Also, make sure to update the plan to reflect any plan options you select. Find general information about 401(k) plans from the Department of Labor and the IRS.
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