401(k) plans can offer employers additional flexibility in plan design and higher contribution limits for employees. Various plan design features may allow employers to maximize their own contributions, but 401(k) plans have additional administrative requirements.
WHAT IS A 401(k)?
A 401(k) plan is a qualified plan that allows employees to defer a portion of their wages to the plan on a pretax basis. The employer can also design the plan to provide a match or
profit sharing contribution. A 401(k) plan can also have a Roth 401(k) option, which allows after-tax contributions.
HOW IS A 401(k) ESTABLISHED?
A 401(k) is established by adopting a 401(k) plan document. The plan document is typically provided by a financial institution or third party administrator and allows some customization in design. The plan must be established by December 31 of the year for which plan contributions are to be made.
HOW MUCH CAN BE CONTRIBUTED TO A 401(k)?
- Employee elective salary contributions for 2020: up to $19,500 ($26,000 if age 50 or older).
- Employer contribution: The employer can provide a match or profit sharing contribution. The sum of the employee elective salary contribution, match, and profit sharing contribution (all sources) cannot exceed $57,000 or the lesser of 100% of employee compensation (2020).
CAN I HAVE A 401(k) IF I AM THE ONLY EMPLOYEE IN MY COMPANY?
Yes. An owner employee can establish a Solo 401(k) plan if he or she does not have any employees other than a spouse.
3 STEPS TO ESTABLISH A 401(k) PLAN
STEP 1: Work with your financial professional or plan administrator to determine your objectives and choose the appropriate plan design.
STEP 2: Notify your employees about the plan and provide a summary plan description. Provide your employees with an election form so they can specify how much salary they want to defer.
STEP 3: Work with your financial professional and/or plan administrator to coordinate employee and employer contributions to the plan.
If you would like a no obligation, second opinion into your 401k plan to see if your plan measures up give us a call at 630-799-8350 or email at info@crosspointwealth.com. We look forward to the opportunity to show where there may be inefficiencies and earn your business.
