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Managing 401(k) plans

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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.
Qualified-retirement-plans
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.

Contact

Eddie Adkins
+1 202 521 1565
eddie.adkins@us.gt.com

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