401k Easy - Plan Design Options

IRS-approved 401k Easy prototype 401k plan allows for significant customization for small companies

Each 401k Easy system includes an IRS-approved prototype 401k plan that we work with you to customize to your 401k needs. Ours is NOT a cookie-cutter 401k plan with take-it-or-leave it investments like with some 401k plans designed for small businesses.

Things your company defines for its 401k Easy plan include:

Your 401k participation eligibility requirements
Your 401k employer matching contribution formula, should you choose to include such contributions
Your 401k employer profit-sharing contribution formula, should you choose to include such contributions
Your 401k employer qualified nonselective contribution formula, should you choose to include such contributions
The vesting formula(s) to be applied to any employer matching and/or profit-sharing contributions, should you choose to include such contributions (qualified nonselective contributions are, by law, 100% vested when made)
The 401k investments you want to offer
Your 401k loan policy, should you choose to include 401k loans in your 401k plan
Your automatic enrollment default investment choice and contribution rate, should you choose to use automatic enrollment in your company plan
Whether or not your plan will be run by the safe harbor method of 401k plan administration and, if so, applicable employer contribution formulas

We offer free help with understanding each of your 401k plan customization options, so you can make educated decisions as to what will be best for your company and its employees. For help with specific topics, we recommend completing the appropriate Order Form and mark "Unsure. Please contact..." for relevant items. Completing an Order Form IN NO WAY obligates you to purchasing anything; it simply gives us the information we need about your company's size, etc., to answer questions regarding your potential 401k plan.

Within parameters set by law, you can have us edit your 401k plan down the road, if you like. You are never locked into the decisions you find suitable today. (If any edits you later have us make to your 401k plan mean re-customization of your 401k plan administration software and/or amendment of your official 401k Plan Adoption Agreement, we reserve the right to charge a fee of up to $500 for system re-customization; re-customization fees are a function of the complexity of the system and document changes required, and in most case are less than $200, if not waived completely.)

401k Easy customization options

The below chart shows the 401k plan customization options allowed by the government regulations (and therefore in 401k Easy) and within that spectrum those typically recommended for a first-time plan.

Understanding the potential effect each option has on a 401k plan's popularity and thus its worth cannot be universally mapped out, as such vary with company size, worker preferences and other company-specific parameters. We are happy to discuss potential effects with you and recommend that interested parties submit the appropriate Order Form and use the "Unsure. Please contact..." buttons to indicate about which items you need more information. As explained in the No Money Due at This Time: The Order Fulfillment Process section, submitting an Order Form in no way obligates your company to placing an order.

401k PLAN PARAMETERS IRS ALLOWS... RECOMMENDATION FOR MOST SMALL BUSINESS 401k PLANS*
PARTICIPANT ELIGIBILITY:
Age Requirement
Anything from none to 21 years of age 21 years of age (we recommend that participation begin on the first day of the first month after the person meets the plan's eligibility requirements)
PARTICIPANT ELIGIBILITY:
Length of Service Requirement
Anything from none to 1 year of service 3 months of age (we recommend that participation begin on the first day of the first month after the person meets the plan's eligibility requirements)
PARTICIPANT ELIGIBILITY:
Union Membership
OK to exclude employees whose service is governed by a collective bargaining agreement Exclude union employees
EMPLOYER CONTRIBUTIONS
(Matching, Profit-Sharing and/or Qualified Nonelective)
Cannot make total contributions to any employee account over the annually-adjusted total allowed contribution amount. Allowed in all forms but not mandatory. Contact us to discuss your particular situation.
VESTING OF EMPLOYER CONTRIBUTIONS Full, immediate vesting

OR

anything less stringent than either:

(a) No vesting earned until the person has participated in the plan for five years, then 100% vesting after five years, or

(b) Seven Year Formula:
0% vested for the first 2 years of participation
20% vested after 3 years
40% vested after 4 years
60% vested after 5 years
80% vested after 6 years
and 100% vested after 7 years of participating in the plan.
Full, immediate vesting

OR

Five Year Formula:
20% vested after 1 year of participating in the plan
40% vested after 2 years
60% vested after 3 years
80% vested after 4 years
100% vested after 5 years of participating in the plan.
INVESTMENT OPTIONS Almost anything goes (stocks, bonds, annuities, company stock, GIC insurance contracts, and more), but selection offered MUST fulfill plan sponsor's "fiduciary responsibility" with respect to offering ample variety, among other things, of 401k investment opportunities Both individual no-load mutual fund families (including no-load institutional mutual funds) and self-directed brokerage accounts are allowable; see our Investments pages for information that will help you determine which (perhaps both) best suit your 401k needs.
401k LOANS Inclusion or exclusion is allowed. Allowed but not mandatory. Not recommended for a plan's first year of operation.
AUTOMATIC (aka, Passive) ENROLLMENT Allowed by the IRS, but the legal system has not yet had occasion to rule on possible infringements upon employee rights. Allowed but not mandatory. No recommendation; consult your legal advisor.
* Understanding the potential effect each option has on a 401k plan's popularity and thus its worth cannot be universally mapped out, as such vary with company size, worker preferences and other company-specific parameters. We are happy to discuss potential effects with you and recommend that interested parties submit the appropriate order form and use the "Unsure. Please contact..." buttons to indicate about which items you need more information. As explained within "No Money Due at This Time: The Order Fulfillment Process" (see above), submitting an order form in no way obligates your company to placing an order.

Recommended 401k design parameters by 401k Easy experts

In addition to the above, we generally recommend the following for 401k Easy plans:

PLAN PARAMETER RECOMMENDATION FOR MOST SMALL BUSINESS 401k PLANS*
PLAN YEAR January 1 - December 31
NORMAL RETIREMENT AGE 65
EARLY RETIREMENT AGE No early retirement age
HARDSHIP WITHDRAWALS Include (mandatory under IRS regulations)
PARTICIPANT ACCOUNT STATEMENTS Monthly. With 401k Easy, plan participants have the self-service freedom to view/print account statements at any time.
* Understanding the potential effect each option has on a 401k plan's popularity and thus its worth cannot be universally mapped out, as such vary with company size, worker preferences and other company-specific parameters. We are happy to discuss potential effects with you and recommend that interested parties submit the appropriate order form and use the "Unsure. Please contact..." buttons to indicate about which items you need more information. As explained within "No Money Due at This Time: The Order Fulfillment Process" (see above), submitting an order form in no way obligates your company to placing an order.

The 401k Easy safe harbor plan option

The IRS offers an alternative means for achieving 401k plan balance: The safe harbor method of 401k plan operation lets 401k plans skip their annual 401k discrimination testing so long as the sponsoring employer meets certain employer 401k contribution requirements that are designed to ensure broad participation in the company plan; the employer, too, must provide 100% immediate vesting of the contributions.

To qualify a 401k plan as a safe harbor plan, an employer must make matching contributions that fulfill the below requirements or make nonselective contributions equal to 3% of each eligible employee's compensation.
Nonselective contributions are made to all eligible employees, regardless of if the employees participate in the company 401k plan. Matching contributions, on the other hand, being based upon salary deferral amounts, are made only to active 401k participants' accounts.
If the employer chooses to make safe harbor matching contributions, those contributions must meet two requirements: First, each non-highly-compensated employee must receive a dollar-for-dollar match on salary deferrals up to 3% of compensation and a 50¢ to the dollar match on salary deferrals from 3% to 5% of compensation. Second, the rate of any matching contributions being made to highly compensated employees cannot exceed that being made to non-highly compensated employees.

The employer must provide annual information to employees explaining the 401k plan's safe harbor provisions and benefits, including that safe harbor contributions cannot be distributed before termination of employment and that they are not eligible for financial hardship withdrawal.

Your 401k Easy system includes such notification within your customized 401k plan's Summary Plan Description, a document for prospective and active plan participants.

If you don't choose the safe harbor method of 401k plan administration, we encourage you to use 401k Easy's online point-and-click compliance testing every month to keep well apprised of your plan's health so there are no surprises when your plan is subjected to its mandatory year-end tests.
Monthly testing takes only seconds with 401k Easy, and frequent testing means you can spot and correct undesirable trends before they compound.
You can test your company's 401k plan for compliance any hour of the day or night, and day of the week, from any computer with Internet access.

The 401k Easy Roth 401k plan option

Cross-tested 401k Easy plans, including "age-weighted" and "new-comparability" plan options

Do Cross-tested 401k plans make economic sense for very small companies?
The "cross-testing" plan configurations described below require specialized, customized prototype plan documents that are not included in our conventional 401k plan offerings. These specialized plan documents add additional plan set-up costs. In addition, compliance testing of cross-tested plans is not automated, and thus requires manual calculations, also at additional cost. Based upon our experience, we do not recommend cross-tested plan configurations for very small companies. In our opinion the additional costs, when compared to the modest increase in deferral benefits that accrue to the owner, are not economically justified. Based upon our 30+ years' experience providing 401k plans to small companies, we recommend against using a "cross-tested "configuration for plans with less than 20 participants, because of the added complexity, cost, and increased potential of attracting an IRS audit.

What is a cross-tested 401k plan?
There are several ways a 401k can be "tested" to determine its compliance with US Department of Labor regulations. If a 401k passes just one of several compliance tests, it is deemed "qualified" under the governmental regulations. If a 401k cannot pass any of the various compliance tests it is deemed "disqualified," which means the plan loses all its tax-advantaged benefits, resulting in serious tax problems for the employer and plan participants alike. It is essential that 401k compliance be checked frequently, and passes at least one compliance test annually.

The main compliance violation the government tries to guard against involves a plan that gives significantly disproportionate benefits to highly-compensated employees (HCEs) to the determent of the non-highly compensated rank and file (NHCs). An individual is a HCE if he or she earns over a certain dollar amount (e.g., $110,000 in 2009) or is a "more than 5% owner" in the business.

In the cross-testing methodology, the company's 401k profit sharing contributions to plan participants are converted mathematically to projected benefits at retirement. These projected benefits are then tested against each other to ensure that the plan does not discriminate in favor of HCEs. Our online software has 401k compliance testing "build-in" and available to be run anytime to monitor the plan's compliance status.

What is the advantage of a cross-tested 401k plan?
In comparison to other compliance tests, a cross-tested 401k permits substantially larger contributions be made to HCEs, or older participants, without violating compliance regulations.

Example: Suppose a 60 year-old business owner (HCE) has two younger employees, both non-highly compensated, and wants to make a large profit-sharing contribution to himself. In this example the business owner pays himself $100,000 annually, and he pays his two 30-year old employees $30,000 annually. If a standard profit-sharing contribution is allocated to the owner and the two employees, each individual will receive the same contribution percentage. In a cross-tested plan, however, the goal is to ensure that the contribution each individual receives will provide the same projected benefit at normal retirement age, generally age 65. To achieve this goal a larger contribution must be made for the 60 year old business owner than for the two 30-year old employees. The business owner has fewer years for the contributions to accumulate before he reaches age 65 and the contributions for the younger employees has 35 years to accumulate, so smaller contributions are made without violating non-discrimination regulations.

Must an employer make a contribution to a cross-tested 401k plan every year?
Yes, a minimum contribution for each participant is required if a contribution is made to the HCEs. Generally, the non-highly compensated employees (NHCEs) must receive an allocation for the year equal to the lesser of either 5% of compensation, or 33% of the highest contribution rate provided to any HCE.

If a contribution amount passes the test in one year, will the same contribution pass the test in the subsequent year?
Not necessarily. Because of employee attrition, new hires and the fact that employees grow older each year, a contribution that passed the nondiscrimination test in one year might not satisfy the test in the subsequent year. Therefore, the proposed contribution for each year must be tested in order to determine whether it would pass the test.

How is a cross-tested 401k plan designed?
Generally, a cross-tested 401k is designed by dividing the employees into two main groups, the most typical division being HCEs and NHCEs. In cross-testing the employer is permitted to make additional groups within these two main groups, and separate contribution amounts within each group. The employer then places the employees receiving the highest allocations in one group, and the other employees in the other groups. The employer can establish groups with characteristics unique to that group (e.g., highly compensated employees who are owners, highly compensated employees who are not owners, paralegals, etc.). Although the cross-testing rules do not impose any requirements for defining groups, the employer may not use criteria such as race, religion or gender.

Although the rules do not specify a method for allocation, the cross-tested plan typically allocates the profit-sharing contribution uniformly among employees within a given group. The employer will make a contribution to a specific group, and then allocate the contribution proportionately based on the compensation of all participants in that group. The separate contribution made for each of the other groups is allocated in the same manner (i.e., based on the compensation of all participants in the group).

How many cross-testing methods exist?
There are two distinct methods for cross-testing a plan. The original cross-testing method relied upon the age of plan participants in determining compliance. This method, called "age weighting" resulted in the following:
Profit-sharing contribution based upon participant's age.
Advantaged older plan participants and disadvantaged younger plan participants.
Resulted in HCEs getting unequal amounts of profit-sharing contributions.

The second method for cross-testing is called "new comparability", and it differs from "age weighting" in the following ways:
Profit-sharing contribution is based upon a participant's classification within the organization.
Advantages owners and key employees over all other plan participants.
Owners receive the same profit-sharing contribution amount.

Comparison of traditionally-tested 401k and a cross-tested 401k. Notice how much more money the HCEs are able to receive in company profit-sharing contributions without violating DOL antidiscrimination rules.

Employee Age Compensation Traditional 401k PS Allocation Cross Tested 401k PS Allocation
A (HCE)
50
$245,000
$49,000
$49,000
B (HCE)
45
$245,000
$49,000
$49,000
C (NHCE)
40
$40,000
$8,000
$3,538
D (NHCE)
32
$35,000
$7,000
$1,750
E (NHCE)
28
$28,000
$5,600
$1,400
F (NHCE)
25
$20,000
$4,000
$1,000
Total
$613,000
$122,600
$105,688

You are never locked into your 401k Easy option decisions

You are never locked into your 401k Easy plan and/or system design decisions. We have many clients that, for instance, exclude 401k loans in the early years of their plan, then add the option in at a later date.

Know that you can have us modify your plan and system design at any time. We do reserve the right to charge for changes initiated by you that require us to re-customize your 401k online software and/or official 401k documents. The maximum charge for re-customization work is $200 per instance and depends upon the complexity of the changes required.


401k Easy - Support

Free 401k Easy technical support and training to get your 401k plan off the ground

Your 401k Easy system comes with user-friendly step-by-step instructions for launching your company plan, introducing it to your employees, and completing its management tasks. We also provide a free-access online support center dedicated to 401k plan operation via 401k Easy.

In addition, we offer our plan sponsors FREE one-on-one support and training via telephone during each plan's launch period. Common topics such as Marketing Your 401k Plan to Your Employees, and Signing Up Plan Participants are also covered in our online downloadable literature, however we're here to help if you have any questions or just prefer hearing the information from a friendly, experienced 401k Easy representative .

Telephone support lines are open weekdays from 10 a.m. to 4 p.m. Pacific Time. (The phone number is provided with your access code information after you purchase your system and we have it all customized to your desired specifications.)
E-mail support is available directly from your online Plan Sponsor and Plan Participant Gateways.


401k Easy - IRS Reporting Support

Let 401k Easy prepare and file your annual 401k IRS Form 5500-SF ...affordably! Only $ 545 for IRS Form 5500-SF preparation and filing, complete!

We offer to you an easy, very low cost option for fulfilling this annual IRS filing requirement. Pension Systems Corporation will prepare your 401k plan's IRS Form 5500-SF (and 60-day extension) for only $545! In addition, at no extra cost, we will prepare the required Summary Annual Report (SAR). All for only $545… a small fraction of what the typical accounting firm, CPA, or tax preparer will charge for the same service.

If you want to learn more about this easy Form 5500SF filing option, please call Farah Vaguchay, Pension Systems Corporation Client Services Manager, at (800) 660-0050 or send an email to fvaguchay@401k-network.com.

Special 401k Fed Forms website (401kfedforms.com) offers free step-by-step 401k Form 5500-SF instructions

401k Easy's plan administration functions collect most of the information needed to complete 401k-related federal reporting forms and schedules.

As part of your 401k Easy subscription you receive access to 401kFedForms (www.401kfedforms.com), a website designed to simplify year-end 401k federal reporting.
401kFedForms shows you which IRS Forms and Schedules are relevant to your particular 401k plan.
401kFedForms' annotated versions of each Form and Schedule tell you where within your customized 401k Easy Plan Sponsor Gateway to find needed information.


401k Easy - Investment Support

401k Easy helps your company meet its 401k plan's 404c requirements

With 401k Easy, meeting ERISA 404c requirements regarding investment diversity and availability of pertinent information is easy:

The 401k Easy software permanently logs all employees' requests for information regarding 401k enrollment, investing, loans, hardship withdrawals and more.
Your plan has can choose from a nearly limitless array of 401k investment opportunities - including no-load mutual funds (including no-load institutional mutual funds) and self-directed brokerage accounts.
Your 401k plan participants' can change their investment choices and/or contribution levels as often as you choose to allow.
Participants' accounts receive daily asset valuation.
Participants receive MONTHLY statements showing their 401k account activity (deposits, distributions, rollovers, etc.).
Participants have 24-hour-a-day, seven-day-a-week access to their personal account information and easy access to prospectuses for all 401k investments offered within your plan.
401k Easy includes links to the online retirement guidance and education services described above. Participants can individually choose to sign up for services from such industry leaders as Financial Engines. Individuals pay for the services themselves, yet your company benefits in meeting its 404c compliance by providing the introduction.
401k Easy includes plan-specific disclosure materials for your employees.
401k Easy includes general 401k plan and investment education materials for your employees.

ERISA 404c protection for 401k plans that use self-directed brokerage accounts

Because self-directed brokerage accounts do not fall under the definition of "designated investments" for 401k plans, companies have no specific sets of information, such as investment prospectuses and performance information, that they must provide to plan participants regarding self-directed brokerage account investments. What does need to be provided is:

A statement that the plan intends to be a 404c plan and that the fiduciaries will be relieved of liability.
The identity of a 404c fiduciary.
A description of available investment alternatives, with specific information about designated alternatives (i.e., specific mutual funds being offered within the plan in addition to the self-directed brokerage accounts).
General disclosure regarding investment through a self-directed brokerage account.

With the exception of disclosure regarding investment through self-directed brokerage accounts, the above must also be supplied for plans using "designated" investments, such as mutual funds.

With 401k Easy, you're covered - Your plan's customized Summary Plan Description, Plan Enrollment Form and related documents provide the above 404c-related information to your employees, and all 401k Easy documents are easy for lay people to read and understand.

For more information about designated and no designated investments and their 404c compliance ramifications, please read Panel Publishers 401k Advisor article, "Personal Brokerage Accounts: Is 404c Protection Available?" September, 1999.

About the required 401k plan fidelity bond, also called an "ERISA bond"

ERISA regulations require that all pension plans, including 401k plans, be insured by an ERISA bond that has a payout equal to 10% of plan assets or $500,000, whichever is less. The annual premiums for these special ERISA bonds (also called fiduciary bonds) are very low, averaging approximately $200 per year or less.

An ERISA bond that covers a 401k plan with $100,000 in assets can cost as little as $100 per year; an ERISA bond covering plan assets of $1 million costs approximately $275 per year.

ERISA bonds are not only inexpensive, but they are readily available and easy to purchase. Your business insurance agent is the best person to contact for ERISA bond coverage. Insurance companies that provide inexpensive ERISA bond coverage include:

CHUBB Insurance
Hartford Insurance
Travelers Insurance
Maloney & Associates

Below are answers to a few frequently asked questions about ERISA bonds:

What is the difference between an ERISA bond, a fidelity bond, and a fiduciary bond?
ERISA bonds and fiduciary bonds are essentially amended fidelity bonds. All three respond to claims involving dishonest acts on the part of asset investment advisors or the employer. The ERISA bond, sometimes referred to as a fiduciary bond, pays claims directly to the plan participants. The fidelity bond pays the claims of the investment advisor that resulted from the dishonest acts of the investment advisor's employees.

How do fidelity bonds and ERISA or fiduciary bonds differ from errors omissions insurance?
The fidelity, ERISA and fiduciary bonds cover against losses due to a criminal act. Errors and omissions insurance provides employers and advisors with coverage against losses due to any actual or alleged negligent act or error committed while engaged in performing professional services.

What's the difference between errors and omissions insurance and fiduciary liability insurance?
Errors and omissions policies protect the investment advisor and employer from losses due to an actual or alleged negligent act. In comparison, fiduciary liability insurance is a sub-category of errors and omissions insurance, and provides additional coverage against a breach by any plan fiduciary. This coverage is not the same as provided by an ERISA bond because it does not insure against criminal acts on the part of a plan fiduciary.