Global Financial Services Group, Inc. - Corporate Insurance and Employee Benefit Specialists

There are no limitations, large or small, as to the number of employees that may be included in the conventional 401(k) plan. For employers with 25 employees or more, 401(k) Plans have become the most popular plan selected to meet their retirement plan benefit needs. The conventional 401(k) plan allows employees to defer a percentage of their income on a pre-tax basis into the plan, up to a general limit of $11,000(as indexed for 2002) and $12,000 (as indexed for 2003) or 100% of compensation, whichever is less.

Additionally, the conventional 401(k) plan allows an employer to provide matching contributions or profit sharing contributions to the plan. Though these contributions are not required and can be constructed in a variety of different formulas, the ability to have three sources of contributions-deferral, match, and profit sharing - make the standard 401(k) plans the most flexible, defined contribution plan.

An example of a matching contribution is 50 cents of each dollar deferred up to the first 6% of the employees salary, for maximum employer exposure of 3% of compensation, is common. Also, profit sharing contributions are discretionary and can use various allocation methods to fit your organization's needs.

CONVENTIONAL 401(K)
PLAN OVERVIEW
PRIMARY BENEFITS

Allows both employee deferral and employer contributions

High degree of design flexibility

May apply eligibility criteria

Flexible vesting schedule

Loans available

Alternative contribution allocation methods permitted

NOTE ALSO

Generally requires more employee education and communication
Non-discrimination testing may limit contributions for highly compensated employees [HCEs]
Involves top-heavy testing
Government reporting required
Distribution restrictions

Conventional 401(k)
Detailed Summary
Plan Size
Businesses of all sizes

Plan Adoption And Contribution Deadlines
Must be established by the employer's fiscal year end. Employer matching contributions or non-elective contributions must be made by employer's tax-filing deadline, including extensions.
Employee pre-tax salary deferrals must be deposited by 15th business day following the month of deferral, or sooner if administratively feasible.

Employee Eligibility Requirements
Flexible, however employees who are at least 21 years old with 1,000 hours of service in a year are generally eligible to participate in the plan
Employer may set less restrictive eligibility standards
Employer can exclude classes such as union employees

Funding
Employee-funded
Employer contributions are optional

Maximum Annual Contributions
Employees can contribute up to $11,000 [in 2002] (as indexed for cost of living)
Employer may make matching and/or profit sharing contributions.
Total contributions limited to 100% of participant's annual compensation up to $40,000.

Vesting
Participants are always 100% vested in employee contributions.
Employer contributions may have a vesting schedule selected by the employer. Though there is a broad diversity of vesting schedules from which an employer may choose, including, but not limited to a three (3) year "cliff", the most popular is a six (6) year graded with 20% increments starting with the employee's second (2nd) year of service.

Withdrawals And Loans
Withdrawals are taxed as ordinary income and are subject to a 10% tax penalty unless taken after the attainment of age 59.5 or because of death, disability.
Availability of hardship withdrawals.
Availability of loans.

Administration And Reporting
Top-heavy and non-discrimination testing required
Annual limits testing and loan tracking required
Required filing of IRS Form 5500
Requires a Summary Plan Description and a Summary Annual Report
A fidelity bond is required
Audit generally required for plans over 100 employees

NOTE: The Economic Growth and Tax Relief Reconciliation Act of 2001 [EGTRRA] has brought about sweeping changes in the rules governing retirement plans. Please consider these changes as you address issues surrounding your retirement plan decisions. For more detailed information and answers to specific questions about this new Federal legislation please visit the Federal Legislation Update section of this website or contact us directly at 847-550-0144 or e-mail us at info@gfsginc.com.

Back to 401k / 403b / 457b - Pension Plans

Global Finanical Services Group
4 E. Piper Suite D
Prospect Heights, IL 60070
847-368-8686 Main
847-368-0715 Fax
877-8GLOBAL Toll Free