A 401(k) plan is a company-sponsored retirement account in which employees can contribute income and where employers may match contributions.
What's a Company Sponsored Retirement Plan?
A company-sponsored retirement plan can include 401(k)s, 4039b)s, profit-sharing, and/or cash-balance plans. All these plans make it easier for employees to save for retirement and Vestwell offers a user-friendly portal for employees and employers to understand and manage their retirement plans.
What is the Plan Adoption Agreement?
Employers can review and select different plan provisions to be included in your plan by executing that Plan Adoption Agreement Guide. Employers can include the following provisions:
Employers select how their employees can save money through their investment accounts, employers can select the following:
- Elective Deferrals: Employees can select Pre-tax or Roth contributions to be made via a payroll deduction.
- Employer Matching Contributions: If elected in the Plan Adoption Agreement, employer matching contributions can be made based on an amount determined by the employer.
- Nonelective Contributions: This contribution is not dependent on how much an employee saves, but instead is a contribution meant to reward employees. These contributions are known as profit-sharing contributions.
- Safe Harbor Contributions: The plan is intended to be exempt from certain compliance tests as long as other requirements are met.
Eligibility is a set of rules, usually a combination of age and service with your company, that determines which employees can participate in the plan when they can enroll, and who is excluded. To avoid mistakes keep your eligibility rules simple, and report all employees on payroll files each and every pay period.
Automatic Enrollment and Automatic Escalation
Automatic Contribution Arrangements are proven options to increase engagement and lead your employees to greater saving habits. There are three types of automatic enrollment features:
- Automatic Contribution Arrangement (ACA): The default savings rate can be set at any integer (e.g 8%, 6%, 4%, 3%) and can be applied to all eligible employees. Automatic increases may be considered.
- Eligible Automatic Contribution Arrangement (EACA): Same as the options above, with two added benefits:
- Extended deadline to correct ADP/ACP test failures (as applicable)
- Permissible withdrawals allow participants who were automatically enrolled to reverse the default contribution within 90 days.
- Qualified Automatic Contribution Arrangement: This option can combine EACA automatic enrollment features with safe harbor features. Vestwell by default pairs a 6% automatic enrollment rate with QACA safe harbor arrangements.
You may also set employees plan to have automatic escalation. If a plan is set for automatic escalation, an employees deferral may be automatically increased annually. Employers will determine the date and percentage by which the increase will occur. Employers will also determine what percentage an employee must reach in order to stop automatic escalation.
Vesting is the process by which a participant's benefits become non-forfeitable; a vested balance represents the benefits a participant has earned the right to keep should they leave employment at any time. Vesting is one way to use your plan as an employee retention tool since you can create a schedule that rewards longevity with your company.
Employers can offer loan options to employees. In order to request a loan, a participant must complete an online application via the Vestwell portal; upon submission of an eligible request, the participant can expect the loan will be processed for payment within 10 days.
Other Types of Withdrawals
There are a few different ways to withdraw funds from your account depending on the features offered by your plan.
- Hardship Distributions: Savers may be able to withdraw funds if they can show a substantial financial need. Unlike a loan, a hardship withdrawal does not need to be paid back.
- In Service Distributions: This is a distribution that a participant may take from a retirement plan while still employed.
- Required Minimum Distributions: RMDs are the minimum amount you must withdraw each year from a retirement plan after reaching age 72.
Click here to learn more about the different ways employees can withdraw funds from their 401(k) account.