Tens of thousands of dollars are on the line. This might sound a bit sensational, but when it comes to choosing the right type of 401(k) plan, this is true a lot more often than many small business owners realize.
401(k) or SIMPLE IRA? Whether you’re just looking to confirm a choice or haven’t even begun to make one, you know this is an important decision. The kind of plan you pick could have an enormous impact on the finances of everyone involved in your business.
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The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020 in response to the COVID-19 crisis. The Act allows – but does not require - employers to loosen the participant distribution and loan provisions of their 401(k) plan and any Coronavirus-affected individual to reduce the tax burden of most 401(k) distributions. 401(k) participants should understand their options under the CARES Act as soon as possible – this economic relief is temporary.
Safe harbor 401(k) plans are the most popular type of 401(k) sponsored by small businesses today. They can help business owners maximize the contributions made to their personal account each year by automatically passing the ADP/ACP and top heavy nondiscrimination tests. However, to achieve safe harbor status, a 401(k) plan must meet certain contribution and participant disclosure requirements. For many business owners, this trade-off is worth it. Here’s why:
It’s impossible to complete annual 401(k) plan testing accurately without a clear understanding of the plan sponsor’s ownership structure. This information is used to determine the company’s controlled or affiliated service group status as well as the Highly Compensated Employee (HCE) and key employee status of plan participants. To make these determinations properly, certain “family attribution” rules must be applied correctly. These IRS rules exist to thwart ownership structures that would otherwise permit a 401(k) plan to discriminate in favor of business owners.
The day-to-day operation of all 401(k) plans must be governed by a written plan document that meets Internal Revenue Code requirements. Occasionally, 401(k) plan documents will require an amendment to reflect law changes or employer intentions. The Internal Revenue Service (IRS) has strict rules for plan amendments. It’s important for employers to understand them. Otherwise, they could miss the chance to make discretionary plan changes, accidentally cut back protected benefits, or face punishment for document non-compliance.