When it comes to company retirement plans, not all plans are the same. Although some advisers prefer to use a cookie-cutter approach to setting up retirement plans, each plan has the ability to establish its own guidelines. Some plans might allow participants to take loans out, some plans allow new employees to rollover their old 401k account from their previous employer into the new company plan, plans have different rules on how employees can access their accounts, and some plans might require new employees to wait 1-year before becoming eligible whereas other plans only require 30 days. The point here is that we can draw up your plan documents pretty much the way you want.
This also pertains to providing a company match or profit sharing contribution. There is a tremendous amount of flexibility to design your plan contribution the way you want it. You can follow the more traditional company match approach where you contribute a certain match amount (1%, 2%, 3%, etc.) with each pay period. The match amount is determined by you, as are the match qualifications for the employees to receive the match. Some plan sponsors want to encourage employees to participate, so they might describe the match in a way that requires the employee to put in 6% in order to receive the full 3% company match. The more committed employees are to the company plan, the more committed they are to their job. Since this approach is a “match”, you would only be contributing money to those employees that are also contributing.
Along with the more traditional style match listed above, you can provide a company match in the form of a lump sum contribution at the end of the year. The lump sum company match at the end of the year ends up costing the company about the same, but it allows for a bit more flexibility with the company funds throughout the year. You may also consider a company profit sharing lump sum contribution at the end of the year if you prefer. This is a company contribution that is discretionary, it takes place at the end of the year, and it is based on the company profitability. Being that it’s not mandatory, it too provides for quite a bit of flexibility.
There are a variety of other types of retirement plan provisions that can be used to add company dollars to employee accounts: Safe Harbor plans, Age weighted plans, Defined Benefit plans, Cash Balance plans, and others. Providing a company match or profit sharing is a great way to attract key recruits, and a great way to retain top employees. Employers are finding out more and more these days that new employees are very interested in employee benefits. In an effort to possibly distinguish your company from the competition, and show your employees your appreciation, implementing a company match or profit sharing contribution can help set you apart.
Once you have determined the type of company match you want to use, the next decision may have to do with determining your vesting schedule. Although an employee’s contributions to the plan are always theirs, vesting has to do with the employers contributions. Employers can establish a time table as to when the money they add to the plan is accessible to the employee. This means that if an employee was to leave the company before the prescribed period of time has elapsed, they might not be able to take your contribution dollars with them.
There are two basic types of vesting schedules: graded vesting and cliff vesting. Graded vesting means that a portion of the account will vest (mature) on certain dates. This usually is set up so that the employee receives more and more of the company match upon their anniversary. For example, if an employee was to work for the company 0-1 year, they receive none of the company match, 1-2 years they receive 20% of the company match, 2-3 years they receive 40%, 3-4 years they receive 60%, 4-5 years they receive 80%, and after 5 years they receive the full 100% of the company match. There are different ways to set up the graded vesting schedule, this is just one example. You can also use the cliff vesting schedule if you prefer. With cliff vesting the employee earns the right to receive the full matching benefit from their company at a specified date, rather than becoming vested gradually. This can take place over a 3 year period where the employee remains unvested until their third year, at which point they are now 100% vested. There are other cliff vesting schedules to consider, this is simply one example.
We realize that not every company is able to provide a match or profit sharing contribution, and that’s ok. On the other hand we also realize that providing a company match or profit sharing contribution does increase employee morale, helps companies attract and retain key personnel, and it increases plan participation. Once again we are here to help design the plan that best fits your overall desires.