Designing a 401K Plan!

For an employer offering a 401K for the first time to its employees, you may surprised to see that is a lot more complex than you would have imagined. In this article, let’s understand what are some design choices that can significantly affect your plan and your employees.

Plan Type

  • Safe Harbor Plan: Allows you to match employee contributions while letting you enjoy automatic compliance success. The matching amount comes in different flavors as set forth in the provisions
    • Non-Elective Matching: A flat 100% match on 3% of the compensation regardless of employee contributions
    • Basic Matching: 100% match on the first 3% of deferrals, then a 50% match on the next 2% of deferrals. Total match that an employee can receive is 4%
    • Enhanced Matching: 100% match on the first 4% of deferrals
  • Non-Safe Harbor Plan: No need for employer matching contributions, but requires annual compliance testing which can be time-consuming and may require corrective measures on failures


  • Age: Allows an employer to restrict employees who don’t meet a certain age. For example, if the plan document sets this to 21 years, then any employee under 21 isn’t eligible to participate in the plan.
  • Service Eligibility: Determines eligibility based on the amount of service an employee has performed for the employer. For example, if the plan document sets this to 3 months, then any new hire will be not eligible until 3 months of employment

Automatic Contribution Arrangement

A way for employers to automatically enroll employees to participate in the 401K plan. This leads to improvement in enrollment by double digits and significantly reduce the risk of failing compliance in the case of a Non-Safe Harbor plan design. It is common for the plan document to set the automatic contribution value to 3-6% of the employee’s paycheck.

Automatic Enrollment comes in three different flavors:

  • ACA
  • EACA
  • QACA


This one is tricky. In the scope of a 401K plan, compensation has a very technical definition which dictates the types of income that can be deferred onto the plan as well the types that must not be. For example, in order to specifically exclude fringe benefits and bonuses, the plan document needs to exclude these types of compensation from the “definition” of compensation when setting up the plan.


A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.

An employee is automatically considered to have an immediate and heavy financial need if the distribution is for any of these:

  • Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.
  • Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
  • Tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents or beneficiary.
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
  • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
  • Certain expenses to repair damage to the employee’s principal residence.

Catch-Up Contributions

Participants over 50 years of age are allowed to defer extra contributions if allowed by the plan document ($7,500 in 2023). It is possible that the plan document specifically disallows this, which should be a bad sign!

A plan document is very complex and has several knobs that can be tweaked. Find a provider that understands all the complexities of creating and executing one.

Reach out to us to see how we can help you in your retirement journey 🚀

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