|
Why should I match my employee's
deferrals?
What match formulas are best?
What employer contribution formulas are available?
What is a "Safe Harbor" plan?
What is vesting?
How are forfeitures handled?
Can forfeitures be returned to the employer?
Why should I match my employee's deferrals?
{
back to top }
All employers want to attract and retain top quality employees.
An employer matching contribution is an attractive benefit. The
match can be subject to vesting requirements, which may help retain
quality employees.
In addition, 401(k) plans are subject to non-discrimination tests
called ADP/ACP tests. Offering a matching contribution generally
increases participation by rank and file workers. This increases
the amount that owners and highly compensated employees can contribute
to the plan.
What match formulas are best? {
back to top }
Most matching formulas tend to match some percentage of the first
6% of compensation. Common formulas include 25% of the first 6%
and 50% of the first 6%. A plan sponsor can also choose to make
a discretionary matching contribution. With a discretionary contribution,
the employer determines the match formula at the end of the year.
For more information contact the Compliance and Technical Support
Department at Pinnacle Financial Services at (561) 547-4200.
What employer profit sharing contribution formulas are available?
{
back to top }
Most 401(k) plans allow an employer to make non-elective (profit
sharing) contributions to eligible employees. Depending upon the
provisions of your plan, there are various methods to allocate the
contribution among the eligible employees.
The simplest method is the pro-rata allocation method. In the pro-rata
method, all eligible employees receive a contribution equal to the
same percentage of pay. An example might be that all employees receive
a contribution of 2% of pay.
Another allocation method is "integrated with social security."
With an integrated allocation formula all employees receive a base
contribution equal to some percentage of pay. In addition, any employee
who earn more than the social security wage base ($102,000 in 2008)
receives an additional contribution for pay greater than the social
security wage base.
Some plans offer "age weighted" or "allocation rate group" methods
of allocating employer contributions. Age weighted plans allow you
to make higher contributions to older employees. Allocation rate
group plans allow you to designate different contribution percentages
for different classes of employees. The rules regarding these types
of allocation formulas are complex. If you would like additional
information, please contact the Compliance and Technical Support
Department at Pinnacle Financial Services at (561) 547-4200.
What is a "Safe Harbor" plan? {
back to top }
A Safe Harbor plan is a plan design that allows the company to
be "deemed to satisfy" the ADP/ACP and top heavy non-discrimination tests. This
means that owners and highly compensated employees may be able to
make larger contributions to their own accounts than they would
have been able to make if they had to pass the tests.
The first Safe harbor plan design available to you is a matching
Safe Harbor. With this design, you make a basic matching contribution
equal to 100% of the first 3% of salary and 50% of the next 2% deferred by your employees.
This means that if a participant defers 5% they will receive a 4% match. Many employers choose to make an enhanced match equal to 100% of the first 4% of salary deferred by their employees.
The second Safe Harbor plan design is the non-elective (profit
sharing) Safe Harbor. With the non-elective Safe Harbor, you make
a contribution of 3% of pay for all eligible employees.
Safe Harbor elections must be made prior to the plan year and participants
must receive notice of the Safe Harbor plan design. If you would
like additional information, please contact the Plan Document Department
at Pinnacle Financial Services at (561) 547-4200.
What is vesting? {
back to top }
Vesting refers to the ownership interest that a participant has
in employer contributions. Vesting is calculated based on years
of service. One common vesting schedule is referred to as a 2/20
vesting schedule. It is depicted below:
| Total Number of Years of Service |
Vested Interest |
| Less than 2 Years of Service |
0% |
| 2 years but less than 3 years |
20% |
| 3 years but less than 4 years |
40% |
| 4 years but less than 5 years |
60% |
| 5 years but less than 6 years |
80% |
| 6 years or more Vested Interest |
100% |
When an employee terminates employment, their vesting percentage is frozen.
If a participant terminates after three years of service, they are
40% vested in the employer contributions. If their matching contribution
account balance at distribution is $3,000.00, their vested account balance is $1,200.00.
The remaining $1,800.00 will be forfeited upon distribution to the
participant.
How are forfeitures handled? {
back to top }
When a portion of the employer contribution is forfeited, the amount
is transferred to a forfeiture account. Assets in the
forfeiture account are used to reduce future employer contribution.
Can forfeitures be returned to the employer?
{
back to top }
Forfeitures may not be returned to the employer. This is a prohibited
transaction per IRS regulations. |
