What are the major issues about 401(k) plans to discuss with a financial advisor?

There are certain requirements of 401(k) plans to be aware of when considering offering a 401(k) plan to your employees. The requirements listed below are the major issues to address with a financial advisor when discussing 401(k) plans.

• There must be a written plan that is communicated to employees.

• The plan must be for the exclusive benefit of employees or their beneficiaries.

• The plan may not discriminate in favor of highly compensated employees. An employee is considered a highly compensated employee for a given year if, at any time in that year or the preceding year, the employee:

  1. was a 5 percent or more owner of the employer, or

  2. earned more than $110,000 for 2009, which may be periodically adjusted for inflation, and was in the top 20 percent of employees in terms of compensation.

• In 2009, the maximum amount that an employee may voluntarily defer into the plan is $16,500 (this amount is adjusted periodically for inflation). Those who are age 50 and over in 2009 can contribute an additional $5,500 for the year.

• Minimum vesting rules must be met. When an employee becomes vested in a retirement plan, it means that he or she has participated in a plan long enough or has provided enough years of service to an employer such that the employee becomes entitled not only to the contributions that the employee might have made but also to the contributions made by the employer.

• An employee's entire interest in the plan must be paid out by April 1 of the year after the employee retires or reaches 70 years of age, whichever is later, or periodic payments must begin no later than April 1 of the year after the employee retires or reaches age 70 and must generally be paid over the lifetime of the employee.

• The plan must provide for a qualified joint and survivor annuity.

• The plan must contain a spendthrift provision.

• Reports must be filed with the IRS, the Department of Labor, and the Pension Benefit Guaranty Corporation, while other reports must be furnished to plan participants and their beneficiaries, under ERISA, the federal pension law.

• The plan will not qualify as a 401(k) plan if it requires that an employee have more than one year of service with the employer or employers maintaining the plan.

• The plan must provide a separate account for each participant and must separately account for contributions that are subject to the special vesting and distribution rules.

• Income, expenses, gains, losses, and forfeitures from other participants must be properly allocated to each plan participant's account, using a reasonable and consistent method of accounting.