Offering employees a 401(K) plan is a good way to attract and retain high-quality employees.
A 401(k) plan allows employees to save for their own retirement. This type of plan was named for section 401(k) of the Internal Revenue Code, which permits employees of qualifying companies to set aside tax-deferred funds with each paycheck.
A 401(K) plan provides employees with a great amount of flexibility. It allows employees to regularly change how much they wish to contribute to their plan, and they usually have several options for choosing how their savings will be invested over time. So unlike a traditional pension plan, a 401(k) plans does not specify from the onset how much money an employee will receive upon retirement.
As an employer, it will be your responsibility, along with the plan provider, to choose the investment options that will be available to your employees and to decide whether or not you will match employee contributions.
The amount of the employee's contribution and how it will be invested is up to the employee, as long as he/she stays within the limits of the plan and the law. Employees can legally contribute up to 15% of their annual earnings as long as the amount does not exceed the legal cap of $10,000. The contributions are also pre-tax, which means you, as the employer, deduct the amount from the employee's salary before calculating income tax. It is because of the fact that the deduction is pre-tax that the IRS sets a cap on contribution.
Like any business purchase you make, you will want to do some research and investigate different 401(K) providers before selecting who you will use. Some things to consider as you research different companies are:
- Provider experience: how long has the provider been assisting with 401(K) plans?
- Fees: What are the fees associated with the plan. All fees should be outlined and broken down for you in writing.
- Record keeping: How does the provider administer the plan?
- Education: Employees are going to have questions about the plan. What sort of education (seminars, printed material, online material) does the provider offer?
