Ask the Expert
Administration Partners, LLC.
Question: As a business owner, I established a 401(k) plan to offer retirement benefits to my employees. The problem is that too few of the employees defer and I keep getting refunds of my personal deferrals to the plan. Can this be avoided?
Answer: A guaranteed way to solve the problem is to amend your plan to a “Safe Harbor” 401(k) Plan. By offering employees a matching contribution of at least 4% of employee compensation you would not have to take a refund. Remember, matching contributions are provided only to employees who defer a portion of their income into the plan. The maximum annual employee deferral to a 401(k) plan is $15,000 plus an additional $5,000 catch-up contribution can be made by participants who attain age 50 by the end of the year.
Question: My employer offers a 401(k) Plan. They will match 50% of the first 4% of my compensation that I defer. I’d rather put my money in the bank in case I need easy access to the funds. Why should I participate in my company’s 401(k) Plan?
Answer: By all means, a personal savings account for emergencies is important; however, you’re actually losing money if you don’t participate in the employer’s plan. First of all, your 401(k) deferrals are made on a pre-tax basis. This amount is not subject to either state or federal income tax. A single employee earning $25,000 per year who defers 4% of pay ($1,000) only has their net paycheck reduced by $802.10 because of the reduced taxes. In addition, when you add in the employers match at the rate of 50% of the 4% deferral—that’s an additional $500 added to your account. A $1,500 contribution that only costs you $802.10 is good business! P.S. Money that goes directly from your paycheck to the retirement plan saves you from re-routing your intended savings for non-emergency use. For more information, contact: Belinda Henning or Kim Newell, Administration Partners, LLC, at (251) 344-3116
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