401(k) Plan Overview
The 401(k) offers employers a simple plan
design with the options necessary to meet
their objectives and maximize employee participation.
401(k) plans include provisions for employee
deferrals, employer matching contributions,
profit sharing contributions and receipt
of employee rollovers from other employer
plans (if desired). All employer contributions
can be made on a discretionary basis. Distributions
are made to participants at retirement,
death, disability, or termination of employment.
These plans offer many advantages to both
employers and employees as described further
401(k) plans provide the following advantages
- Aid in attracting and retaining
- Employee deferrals are deductible
to the employer.
- Contributions and administrative
expenses paid by the plan sponsor are
also tax deductible.
- Flexible matching contribution
levels and discretionary profit sharing
- Graduated vesting schedule
for employer contributions.
401(k) plans also provide advantages for
- Ability to save pre-tax dollars
through the convenience of payroll deduction.
- Choice of investment options.
- Employee deferrals that are
always 100% vested.
- Contributions and earnings
that are tax-deferred until the money
is withdrawn – generally at retirement
when an employee may be in a lower tax
- Employer matching or profit
sharing contributions, depending upon
- Toll-free telephone and Internet
access to account balances and the ability
to reallocate investments through your
- Access to a call center through
your Investment Institution.
Additional information pertinent to 401(k)
- Employees may generally contribute
up $18,000 in 2017.
- Employer contributions may
vary from 0% to 25% of the total annual
eligible payroll and are usually determined
after the close of each plan year
- Total allocations (contributions
plus forfeitures) to a single participant
cannot exceed 100% of his individual compensation
or the annual addition limit in effect
for that year ($54,000 for 2017).
- The annual compensation limit
is $270,000 for plan years beginning in
- Distributions may be made in
case of a hardship but may be subject
to a 10% withdrawal tax (in addition to
income taxes) prior to age 59 ½.
- “Catch-up” contributions
may be made by participants 50 years or
older in the amount of $6,000 in 2017.
Matching Contribution Worksheet
This worksheet may be used to estimate
the employer matching contribution based
on different employee deferral and employer
matching rates. In using this worksheet,
assumptions will have to be made about the
contribution level of employee deferrals.
- Total Payroll - This should equal gross
salaries for all employees.
- “Eligible” Payroll - Total
salaries for all employees who are age
21 or older and have completed at least
one year of service.
- Employer Matching Contribution Formula
- The following chart illustrates examples
of different matching contribution levels
from which you may choose. It shows matching
amounts capped at three different levels
to create nine factors. Use these factors
to determine your potential match:
Match Up To (% Deferred by
Total Payroll = $400,000
Eligible Payroll = $350,000
Employee Deferrals = 4% of eligible
Employer Match = $ .50 for each $1.00
deferred up to 4% eligible compensation
(Factor = .020)
Employee Deferral Contribution = $14,000
(.04 x $350,000)
Employer Match Contribution = $7,000
(.02 x $350,000)
a) Total Payroll = $__________
b) Eligible Payroll = $__________
c) Employee Deferrals = __________%
of eligible compensation
d) Employer Match = __________ Factor
= ($__________ up to ________% eligible
Deferral Contribution = $________ (b
Employer Match Contribution = $ ________(b
Top-Heavy Testing / The "Safe-Harbor" Alternative
- In order to obtain the distinctive tax-favored
advantages of a 401(k) plan, it must not
discriminate in favor of higher-paid employees.
A special test called the Actual Deferral
Percentage test (ADP) is required. This
test compares the average deferral percentages
of the highly compensated employees (HCE)
and the average deferral percentages of
the non-highly compensated employees (NHCE).
A Highly Compensated Employee
is anyone in the current or look-back year
who is a 5% owner or received compensation
of more than $120,000 in 2017.
The following chart illustrates
the maximum deferral percentage available
to highly compensated employees, based on
the average deferral percentage for the
non-highly compensated employees.
Employer matching contributions and employee
voluntary non-deductible contributions must
also meet similar non-discrimination tests.
An additional test will be required for
Top-Heavy Testing - A
401(k) plan is top-heavy if the present
value of the account balances for “Key
Employees” exceed 60% of the total
present values of account balances of all
participants. If the plan is determined
to be top-heavy, a required employer contribution
must be made to all non-key eligible employees
equal to the lesser of 3% of the non-key
employees compensation or the highest individual
deferral percentage of the key employees.
For further information about Key Employees,
please contact your NRS Representative.
The “Safe-Harbor” Alternative
- As described above, 401(k) plans are required
to meet certain non-discrimination requirements.
Non-discrimination testing must be run each
year to ensure that the plan complies with
these requirements. If the tests do not
pass, corrections must be made (often deferrals
and/or matching contributions need to be
returned to some or all of the HCEs).
A 401(k) “Safe-Harbor” plan
allows an employer to avoid running these
tests provided the employer is willing to
satisfy the requirements of a Safe-Harbor
plan. For instance, to satisfy the ADP test,
the employer could provide either of the
- A 3% of compensation non-elective contribution
to all eligible NHCEs; or
- A match of 100% of deferrals up to
3% of compensation and 50% match on deferrals
from 3% to 5% of compensation for deferring
These contributions must be 100% vested.
The first Safe-Harbor alternative described
above may also be used to satisfy a top-heavy
requirement (if necessary).