+ Who can establish a 401(k) Plan?
Sole proprietors, partnerships, corporations and nonprofit entities may establish 401(k) Plans.
+ What is the deadline for establishing a 401(k) Plan?
401(k) Plans may be established at any time up until the employer’s tax return due date (including extensions). Salary deferral contributions, however, may only be made from compensation earned prospectively after plan establishment.
+ Which employees must be covered by a company’s 401(k) Plan?
Although employers may adopt less restrictive eligibility requirements, 401(k) Plans generally must include employees who
Special rules apply in the case of employees who work less than 1000 hours per year. In addition, some arrangements may allow employers to restrict employer contributions to employees who have worked for the employer for at least two years provided employer contributions are immediately 100% vested.
Note: In addition, union employees and nonresident alien employees may—under specific circumstances—be excluded from participation in a Profit-Sharing Plan.
+ What types of employer contributions are permissible under a 401(k) Plan?
401(k) Plans allow for a variety of employer contributions options. The two most common types of employer 401(k) Plan contributions are profit-sharing contributions and matching contributions.
+ Are employer contributions required under a 401(k) Plan?
No. As a general rule, employer contributions are not required under a 401(k) Plan. Employer contributions are, however, required under certain types of “Safe Harbor” 401(k) Plan arrangements that provide incentives for employers to commit to making employer contributions in exchange for being relieved of various plan testing requirements.
+ What is the maximum employer contribution permitted under a 401(k) Plan?
The maximum employer 401(k) Plan contribution that may be made to any one plan participant is—technically speaking—the lesser of 25% of compensation or $61,000 (2022) (or, $66,000 (2023)). However, the employer contribution limit is generally lower than this given that employee salary deferrals must be accounted for in the overall limit.
+ What is the maximum employee salary deferral contribution under a 401(k) Plan?
Employees can defer up to $20,500 ($27,000 if age 50 or older) for 2022 and up to $22,500 ($30,000 if age 50 or older) for 2023. Depending on the type of 401(k) Plan arrangement, deferrals by a company’s Highly Compensated Employees (HCEs) may be further restricted based on the average deferral rate of the company’s non-HCEs.
+ What is the deadline for making employer contributions to a 401(k) Plan?
Contributions must be made by the due date of the business tax return (including extensions) of the year for which the contributions are being made.
+ Can an employer choose to include a vesting schedule in a 401(k) Plan?
Employers typically can choose to have a vesting schedule for employer contributions (e.g., matching and/or profit-sharing contributions). However, employee salary deferral contributions are always 100% vested.
+ What information do employers need to give employees concerning the company’s 401(k) Plan?
Employers must provide employees who are eligible to participate in the 40(k) Plan with copies of the Summary Plan Description (SPD), the summary annual report, and an annual statement of the participant's account must be provided to the participants. Notice of opportunity to make/change salary deferral election is also required. In addition, plan participants may request that additional information be provided.
+ Are there restrictions on when participants can take distributions from the 401(k) Plan?
While distribution restrictions can vary between 401(k) Plan arrangements, 401(k) Plan participants generally may not take distribution of salary deferral contributions until one of the following events s occurs:
+ Are participant loans permitted under a 401(k) Plan?
Some 401(k) Plans permit participants to borrow from the plan. The plan document must specify if loans are permitted.
+ Are Roth contributions permitted under a 401(k) Plan?
Yes, Roth contributions may be permitted under a 401(k) Plan.
+ Is there any government reporting that is required by an employer sponsoring a 401(k) Plan?
Employers sponsoring a 401(k) Plan must generally file a Form 5500-series return with the federal government on an annual basis. Ongoing participant disclosures are also required.
+ How is a 401(k) Plan different from a SIMPLE IRA Plan?
A SIMPLE IRA Plan is a simplified, cost-effective type of plan that is funded primarily through employee salary deferral contributions with a modest employer contribution. SIMPLE IRA contributions are made to the SIMPLE IRAs of each eligible participant. Once funds are contributed to each eligible participant’s SIMPLE IRA, the funds are controlled by the plan participant, meaning the plan sponsor does not bear the ongoing responsibility of overseeing the administration of a group trust account. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving you—as the plan sponsor—from the additional burdens and responsibility of ongoing plan administration of a 401(k) Plan.
In comparison, 401(k) Plans have more “bells and whistles” (e.g., distribution restrictions, vesting schedules, plan loans and Roth contributions) than SIMPLE IRA Plans and, as a general rule, allow greater aggregate contributions than what is permissible under SIMPLE IRA Plans. 401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and/or matching contributions). While 401(k) Plans often include an employer funding component, not all types of 401(k) arrangements require employer funding.
Under a 401(k) Plan, contributions are generally held in a group trust account that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. With government reporting, discrimination testing and recordkeeping, the 401(k) Plan will typically be more costly and more time consuming to administer than a SIMPLE IRA Plan.
+ How is a 401(k) Plan different from a Profit-Sharing Plan?
401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and/or matching contributions). While 401(k) plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. 401(k) Plans provide tremendous funding flexibility. Under a 401(k) Plan, the employer is eligible to contribute as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each employee can elect to make additional “employee deferral” contributions of up to $20,500 ($27,000 if age 50 or older) for 2022 and up to $22,500 ($30,000 if age 50 or older) for 2023. The maximum aggregate contribution that may be allocated to any one 401(k) Plan participant is $61,000 ($67,500 if age 50 or older) for 2022 and $66,000 ($73,500 if age 50 or older) for 2023. If a 401(k) Plan allows for Roth contributions, the employee salary deferral portion of the contribution can be either pre-tax or after-tax (i.e., Roth), whereas employer contributions to a 401(k) Plan are strictly pre-tax.
Unlike 401(k) Plans, Profit-Sharing Plans are funded exclusively through employer contributions. With a Profit-Sharing Plan, the plan sponsor determines the applicable funding on a year-by-year basis, with contribution levels ranging from 0% to 25% of compensation. The maximum amount that may be allocated to any one Profit-Sharing Plan participant’s account is $61,000 for 2022 and $66,000 for 2023.
+ How is a 401(k) Plan different from a SEP Plan?
A SEP Plan is funded exclusively through employer contributions that are made to the Traditional IRAs (often referred to as “SEP IRAs") of each eligible plan participant. Once funds are contributed to each eligible participant’s IRA, the funds are controlled by the plan participant. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving the plan sponsor from the additional burdens and responsibility of ongoing plan administration of a 401(k) Plan. The plan sponsor of a SEP Plan decides the plan funding level from year to year—anywhere from as low as 0% to as high as 25% of each eligible plan participant’s compensation. The maximum amount that may be allocated to any one plan participant’s account is $61,000 for 2022 or $66,000 for 2023.
In contrast, 401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and/or matching contributions). While 401(k) Plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. Under a 401(k) Plan, the employer is eligible to contribute as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each eligible employee can elect to make “employee deferral” contributions of up to $20,500 ($27,000 if age 50 or older) for 2022 and up to $22,500 ($30,000 if age 50 or older) for 2023. The maximum aggregate contribution that may be allocated to any one 401(k) Plan participant is $61,000 ($67,500 if age 50 or older) for 2022 and $66,000 ($73,500 if age 50 or older) for 2023.
401(k) Plans also have more “bells and whistles” than SEP Plans (e.g., distribution restrictions, vesting schedules, plan loans and Roth contributions). While 401(k) Plans typically offer more features, they are also generally more costly and more time consuming to administer than a SEP Plan as contributions are held in a group trust account that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. In addition, 401(k) Plans are subject to additional reporting and testing requirements that are not required for SEP Plans.