Can I Create a 401(k) Separately for Hourly & Salaried Employees?
Original post by Angie Mohr of Demand Media
Creating a 401(k) retirement plan for your employees is a much simpler process than setting up a defined benefit pension plan. There are rules that must be followed, however, due to the fact that 401(k) plans fall under the Employee Retirement Income Security Act (ERISA) -- a federal statute that regulates retirement plans set up by employers and provides for tax benefits for employees.
401(k) Plan Options
The two main types of 401(k) plans that you can set up for your employees are the traditional and the Roth. Both fall under ERISA rules. In a traditional 401(k) plan, the employee contributions to the plan are made pre-tax, meaning that no income tax is calculated on the portion of the compensation contributed to the plan. Employers may also have a matching portion where they match some or all of the employee contributions. The employer portion is not taxable to the employee. Contributions to a Roth 401(k) plan are after-tax, meaning that they are deducted from the net income of the employee after taxes have been calculated.
In both traditional and Roth 401(k) plans, federal law requires that the plans do not discriminate among employees. For example, you cannot offer a 401(k) plan to only the owners or the managers of the company. Equal benefits must be provided to all employees who are 21 and over and who have completed at least one year of service with the company. The plan can be offered sooner but it must be offered at the one year mark. This rules doesn't mean that every employee has the same dollar amount withheld from his pay or that the employer pays the same dollar amount to every plan. 401(k) plans are often set up so that an employee contributes a percentage of income and the employer may match part of that. Lower income employees will get less benefits from a matching plan than higher income employees.
Setting Up a 401(k) Plan
To set up a 401(k) plan, start by shopping around at various financial institutions and getting references from companies in your industry. Every plan is different and has different benefits and fees. Once you have found an administrator that you want to work with, it will provide you with several options to choose from, depending on the size of your company and the size of your workforce. Read the small print to ensure that there are no restrictions in the plan that make it difficult for your company to manage or will reduce the potential benefits to your employees.
Non-qualified plans, by definition, do not meet the ERISA rules and therefore do not get the same tax benefits. They are, at their most basic, promises by the employer to provide pension income to retired employees. They are most often funded by the employees themselves without an employer contribution component. The benefit to the employer of a non-qualified plan is that it can be much more flexible in its setup and administration. You can set up a non-qualified plan for any subset of your workforce without having to extend it to everyone. For example, you could offer it only to salaried employees and not hourly, or to managers and not to front line staff. Non-qualified plans, however, often take much more company involvement in management and administration than do qualified plans, such as 401(k)s.
- The CPA Journal; The Roth 401(k) and Financial Planning Strategies; Lauricella; May 2006
- The CPA Journal; Final Roth 401(k) Distribution Regulations; Slott; May 2008
- The Bogleheads: Employer Retirement Plans Overview
About the Author
Angie Mohr is a syndicated finance columnist and freelancer who has been writing professionally since 1987. She is the author of the best-selling Numbers 101 for Small Business books and "Money$marts: Teaching Your Kids the Value of a Buck." She is a chartered accountant and certified management accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.
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