In all 401(k) plans, participants can make contributions through salary deductions. You can decide on your business’s contribution to participants’ accounts in the plan.
Traditional 401(k) Plan - If you decide to contribute to your 401(k) plan, you have further options. You can contribute a percentage of each employee’s compensation for allocation to the employee’s account (called a nonelective contribution), or you can match the amount your employees decide to contribute, or you can do both (within the limits of the current tax law).
For example, you may decide to add a percentage — say, 50 percent — to an employee’s contribution, which results in a 50-cent increase for every dollar the employee sets aside. Using a matching contribution formula will provide additional employer contributions only to employees who make deferrals to the 401(k) plan. If you choose to make nonelective contributions, the employer makes a contribution for each eligible participant, whether or not the participant decides to make a salary deferral to his or her 401(k) plan account.
Under a traditional 401(k) plan, you have the flexibility of changing the amount of employer contributions each year, according to business conditions.
Safe Harbor Plan - Under a safe harbor plan, you can match each eligible employee’s contribution, dollar for dollar, up to 3 percent of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not 5 percent, of the employee’s compensation. Alternatively, you can make a nonelective contribution equal to 3 percent of compensation to each eligible employee’s account. Each year you must make either the matching contributions or the nonelective contributions. The plan document will specify which contributions will be made and this information must be provided to employees before the beginning of each year.
Roth Contributions - 401(k) plans may permit employees to make after-tax contributions through salary deduction. These designated Roth contributions, as well as gains and losses, are accounted for separately from pretax contributions. However, designated Roth contributions are treated the same as pretax contributions for many key aspects of plan operations, such as contribution limits.
Contribution Limits - Employer and employee contributions and forfeitures (nonvested employer contributions of terminated participants) are subject to a per-employee overall annual limitation. This limit is the lesser of:
- 100 percent of the employee’s compensation, or
- Annual IRS set limits.
Contribution Deposits - the deductions from employees’ paychecks for contribution and loan payment to the plan must be deposited with the plan as soon as reasonably possible, but no later than the 15th business day of the month following the payday. If you can reasonably make the deposits in a shorter time frame, you need to make the deposits at that time.
For plans with fewer than 100 participants, salary reduction contributions and loan payments deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law.
For all contributions, employee and employer (if any), the plan must designate a fiduciary, typically the trustee, to make sure that contributions due to the plan are transmitted. If the plan and other documents are silent or ambiguous, the trustee generally has this responsibility.