Florida Estate Planning Lawyer Blog

401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for Florida businesses considering a retirement plan, providing benefits to employees and their employers. Employers start a 401(k) for a host of reasons.
To attract and keep employees.

To decide ho much to contribute to their retirement accounts before taxes.
Employers receive a tax deduction.
To benefit all employees.
To grow the money through investments in stocks, mutual funds, money market funds, savings accounts, and other investment vehicles.
Contributions and earnings generally are not taxed by the Federal government or by most State governments until they are distributed.
A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative burdens.

Beginning in 2006, 401(k) plans may be established or amended to permit employees to designate some or all of their contributions (employee deferrals) as Roth contributions. These contributions are made on an after-tax basis, but distributions (including earnings) are tax-free (if certain conditions are met).

Establishing A 401(k) Plan
When you establish a 401(k) plan you must take certain basic actions. For instance, one of your decisions will be whether to set up the plan yourself or consult a professional or financial institution – such as a bank, mutual fund provider, or insurance company – to help you establish and maintain the plan.

Initial Actions
Here are four basic actions necessary to have a tax-advantaged 401(k) plan:

Adopt a written plan - Plans begin with a written document that serves as the foundation for day-to-day plan operations. Consider obtaining assistance from a financial institution or retirement plan professional. In either case, you are bound by the terms of the plan document.

Before beginning the plan document, however, you will need to decide on which type of 401(k) plan that is best for you.

A traditional 401(k) plan offers the maximum flexibility of the three types of plans. Employers have discretion to make contributions on behalf of all participants, to match employees’ deferrals, or do both. These contributions can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). In addition, a traditional 401(k) allows participants to make pre-tax contributions through payroll deductions. Annual testing ensures that benefits for rank and file employees are proportional to benefits for owners/managers.

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, must provide for employer contributions that are fully vested when made. However, the safe harbor 401(k) is not subject to many of the complex tax rules that are found with a traditional 401(k) plan including the annual nondiscrimination testing.
Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.

A SIMPLE 401(k) plan was created for small businesses, It is a cost-efficient way to offer retirement benefits. SIMPLE 401(k) plans are not subject to the annual nondiscrimination tests. Like a safe harbor 401(k) plan, the employer is required to make fully vested contributions. A company can't have more than 100 employees who receive more than $5000 in compensation in the preceding calendar year. In addition, employees that are covered by a this plan may not receive any contributions or benefit accruals under any other plans of the employer.

Once your have decided on the type of plan for your company, you will have flexibility in choosing some of the plan’s features -- such as which employees can contribute to the plan and how much. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.