Managing 401(k) plans

Managing 401(k) plansCompensation and Benefits Bulletin
Compensation and benefits remain some of the trickiest areas for businesses. Benefit plans and employee compensation are big expenses for most employers, but they’re also the key to retaining and attracting top talent. Your first step should be understanding all the requirements, because running afoul of the many restrictions built into compensation and benefits laws can be costly. The second step should be taking a hard look at plan design so you can be sure your plans are cost-effective and attract the right employees. This article focuses on 401(k) plans. Read more about tax planning in other compensation and benefit areas.

Qualified plans such as 401(k)s or 403(b)s remain among the most popular retirement plans for employers. But administering them can be costly and complex. Unless you operate your 401(k) plan under a safe harbor, you must perform nondiscrimination testing annually to make sure the plan benefits don’t favor highly compensated employees over other employees.

The safe harbors require employer contributions. If you operate under a safe harbor but need to conserve cash and cut costs by ceasing 401(k) contributions, you must amend the plan and give employees advance notice. Employees must have the option of changing their contributions during this advance notice window, and the nondiscrimination test must be performed for the entire year.

New fee disclosure requirements became effective in late 2012, and more are on the way. With the decline of pension plans and the shaky financial outlook for Social Security, policymakers are increasingly trying to make it easier for taxpayers to buy annuities with retirement savings. Regulators may eventually require employers to calculate and disclose how much their retirement plan account value would purchase on the annuity market.
Despite the challenges of a qualified plan such as a 401(k), it is still an attractive option for many reasons:

  • A qualified plan has significant design flexibility to allow sponsors to provide value to their top executives.
  • Nonqualified plans aren’t as tax-effective for plan sponsors as qualified plans, because the employer doesn’t receive a current tax deduction for contributions to a nonqualified plan.
  • Employer contributions to a qualified plan are never subject to Federal Insurance Contributions Act (FICA) tax or other payroll taxes.
  • Distributions can be rolled over on a tax-free basis, so an employee’s taxable event is delayed until the actual payout from a tax-qualified retirement vehicle such as an IRA.
  • The use of qualified retirement plans avoids Section 409A penalty risks.
The following highlights key 401(k) information for 2014 and 2015.
The Roth option
If you don’t already do so, consider offering employees a Roth version within your qualified plan. These are popular with employees, and lawmakers have made it easier for them to roll over their traditional account into a Roth version within the employer plan.

A 2013 bill expanded employee's ability to convert traditional retirement accounts like 401(k)s or 403(b)s into Roth accounts. A 2010 provision had originally allowed employees to put distributions from these accounts directly into an employer-offered Roth account, but distributions were generally allowed only when taxpayers separated from service, reached age 59½, died or become disabled, or received a qualified reservist distribution. The 2013 provision allows a Roth conversion regardless of whether distributions are allowed.

Some of the best tax savings offered by the code come in the retirement space. Just make sure you are staying on top of requirements and regularly evaluating your plan design to get a strong return from your investment.


Eddie Adkins
+1 202 521 1565

Tax professional standards statement
This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.