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Plan Customization

of your 401(k) Easy Online run-it-yourself 401k plan

1)

The IRS-approved prototype 401k plan

2)

We customize the prototype 401k plan to fit your company's 401k needs

3)

Standards we recommend for most small business 401k plans

4)

Safe harbor option in 401k plan administration

5)

401(k) Easy Online offers the Roth 401(k) feature.

6)

401k Contribution Guidelines and Limitations.

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[topic 1]

The IRS-Approved Prototype 401k Plan

Your 401k Easy Online system comes with an IRS-approved prototype 401k plan that we work with you to customized to your 401k needs. You're never faced with some cookie-cutter 401k plan and take-it-or-leave it investments like with some 401k plans designed for small businesses.

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

-- Your 401k participation eligibility requirements

-- Your 401k employer matching contribution formula, if any

-- Your 401k employer profit-sharing contribution formula, if any

-- Your 401k employer qualified nonelective contribution formula, if any

-- The vesting formula(s) to be applied to any employer matching and/or profit-sharing contributions, if any (qualified nonelective contributions are, by law, 100% vested when made)

-- The 401k investments you want to offer

-- Your 401k loan policy, if you want your plan to offer 401k loans

-- Your automatic enrollment default investment choice and contribution rate, if using automatic enrollment

-- 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, complete the appropriate Order Form and mark "Unsure. Please contact..." for any items you'd like assistance with. Completing an Order Form IN NO WAY obligates you to actually 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, too. You're 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 $995 to cover our costs.)

 

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[topic 2]

We Customize the Prototype 401k Plan to Fit Your Company's 401k Needs

As we said above, with 401k Easy Online there are several things your company defines for its 401k plan:

-- Your 401k participation eligibility requirements

-- Your 401k employer matching contribution formula, if any

-- Your 401k employer profit-sharing contribution formula, if any

-- Your 401k employer qualified nonelective contribution formula, if any

-- The vesting formula(s) to be applied to any employer matching and/or profit-sharing contributions, if any (qualified nonelective contributions are, by law, 100% vested when made)

-- The 401k investments you want to offer

-- Your 401k loan policy, if you want your plan to offer 401k loans

-- Your automatic enrollment default investment choice and contribution rate, if using automatic enrollment

-- Whether or not your plan will be run by the safe harbor method of 401k plan administration and, if so, applicable employer contribution formulas

The following chart offers more information on each of these items, plus our recommendations for most small business 401k plans:

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Parameter for Your 401k Plan

IRS Allows...

Recommendation for Most 401k Easy Online Plans

Participant eligibility: age requirement

anything from none to 21 years of age

21 years of age

Participant eligibility: length of service requirement

anything from none to 1 year of service

3 months of service

Participant eligibility: union membership

Can 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

Contact us for details and recommendations for your particular 401k plan

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; 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; and 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 and self-directed brokerage accounts are allowable; see our Investments pages for information that will help you determine which (perhaps both) is best for your 401k plan.

401k loans

Inclusion or exclusion allowed

Not recommended in 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 infringement upon employee rights

No recommendation; consult your legal advisor

 

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[topic 3]

Standards We Recommend for Most Small Business 401k Plans

The entire 401k Easy Online system grew from the years of experience that our sister company, Pension Service Associates, has had building and servicing quality 401k plans that appeal to the special needs of small and medium-sized companies.

That experience (coupled with Internal Revenue Code mandates) brought us to the following standards for all 401k Easy Online 401k plans:

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Parameter

401k Easy Online Standard

Plan Year

January 1 - December 31

Eligibility Commencement

Participation begins on the first day of the first month after the person meets the plan's age and length of service eligibility requirements

Normal Retirement Age

65

Early Retirement Age

No early retirement age

Hardship Withdrawals

Included (IRS-mandated)

401k Loans

Allowed, but not mandatory (see Options chart, above)

Employer Contributions

Allowed in all forms, but not mandatory (see Options chart, above)

Participant Account Statements

Employee-participants can process and print current 401(k) statements at the click of a mouse.

 

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[topic 4]

The Safe Harbor Option in 401k Plan Administration

401k compliance tests are designed to ensure 401k plans have at least a threshold balance of participation of rank-and-file employees in relation to highly-paid employees.

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 (designed to ensure broad participation in the company plan) and provides 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 nonelective contributions equal to 3% of each eligible employee's compensation.

-- Nonelective 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 Online system includes such notification within your customized 401k plan's Summary Plan Description, a document for prospective and active plan participants that's updated at least annually.

-- If you don't choose the safe harbor method of 401k plan administration, we encourage you to use your customized 401k plan administration software's 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 Online, and frequent testing means you can spot and correct undesireable trends before they compound.

-- Test your company’s 401(k) plan for compliance any hour of the day or night, and day of the week, from any computer with Internet access---That’s total 401(k) compliance control and oversight!

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[topic 5]

401(k) Easy Online offers the Roth 401(k) feature: 

AS THE NAME suggests, a Roth 401(k) combines features of the traditional 401(k) with those of the Roth IRA. It's offered by employers like a regular 401(k) plan, but as with a Roth IRA, contributions are made with after-tax dollars. Participants don't get an upfront tax-deduction, the account grows tax-free, and withdrawals taken during retirement aren't subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.

The Roth 401(k) can offer advantages to high-income individuals who haven't been able to contribute to a Roth IRA because of the income restrictions. (Eligibility for 2009 phases out between $105,000 and $120,000 for single filers and $166,000 to $176,000 for those who are married and file jointly).

Roth 401(k) accounts are subject to the contribution limits of regular 401(k)s — $16,500 for 2009, or $22,000 for those 50 or older by the end of the year — allowing individuals to stock away thousands of dollars more in tax-free retirement income than they would through a Roth IRA. (In 2009, Roth IRA contributions are limited to $5,000 a year, or $6,000 for those 50 or older.)

The hitch: Those limits apply to contributions to both types of 401(k) plans, so participants can't save $16,500 in a regular 401(k) and another $16,500 in a Roth 401(k). Employees who are offered this option face a difficult choice: Contribute to a Roth 401(k) and suffer a cut in take-home pay (since contributions are made with after-tax dollars), or stick with a traditional 401(k) and hope that in retirement, their tax rate will be lower than it is now. Alternatively, they could hedge their bets by contributing to both accounts.

If the employee expects tax rates to be the same or higher in retirement than it is now, he or she might be better off with a Roth 401(k). This is likely to be the case with young people who are just starting their careers and expect their income to increase in the future. If the employee is in peak earning and anticipates his or her tax bracket will be lower in retirement, then continuing to use a traditional 401(k) is probably the best option. In reality, of course, things are much more complicated. For one, no one can predict with certainty what tax rates will be in the future, though the general consensus is that they're likely to rise to help the government offset growing budget deficits and pay for Social Security and Medicare. 

 


Traditional 401(k) Contributions      


    Roth 401(k) Contributions

When you will pay taxes
on your contributions

• You pay the tax upon withdrawal. Contributions are tax-deferred, so current taxes are reduced.

• You pay regular income tax on your contributions before the money goes into your account. Current taxes are not reduced.

When you will pay taxes on any investment earnings

• You pay taxes on the full amount of any distribution, including earnings, at ordinary income tax rates in effect upon withdrawal.

• Your contributions have already been taxed, so there is no tax on them and no taxes on any earnings if you take a qualified distribution.

Qualified distribution rules*

• Contributions and any earnings remain in account until age 591⁄2 or a separation from service that qualifies for retirement distributions. Withdrawals are subject to current ordinary income tax at withdrawal (and a 10% tax penalty may apply before age 591⁄2) unless the tax deferral is continued.

• Contributions and earnings are distributed tax-free if they meet the requirements of
A qualified distribution; earnings in a non-qualified distribution are subject to current ordinary income tax (and a 10% tax penalty may apply before age 591⁄2) unless the tax deferral is continued.

Impact of contributions on take-home pay

• Since contributions are pre-tax, your current income tax is reduced and each
$1 contributed reduces your take-home pay by less than $1.

• Because you pay current taxes on your contributions, take-home pay is reduced dollar for dollar by your contributions.

Rollovers from your account

• You may roll over your account balance upon termination to a traditional IRA,
A 401(k) plan or another qualified employer-sponsored plan.

• You may roll over your account balance upon termination to a Roth IRA or another Roth 401(k) or Roth 403(b) account in a qualified employer plan.

Note: For purposes of the 5-year rule for qualified distributions, the date of the initial contribution to a Roth IRA governs.

Taxes on employer match, if applicable

• Employer matching contributions are made on a pre-tax basis; contributions and any earnings are taxable upon withdrawal.

• Same. The employer match is not treated as a Roth contribution.

Required minimum distributions

• You must begin required minimum distributions by April 1 of the year following the year in which you reach age 701⁄2 or at retirement, if later.

• You must begin required minimum distributions by April 1 of the year following the year in which you reach age 701⁄2 or at retirement, if later.

Loan and hardship

• Account balances are available for 401(k) loans and hardship withdrawal if the plan allows.

• Contributions are available for 401(k) loans and hardship withdrawal if the plan allows.

 

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[topic 6]

401k Contribution Guidelines and Limitations.

A There are three different federally mandated limitations as to how much an employee can contribute to his or her 401(k) plan annually, and how much the employer can likewise contribute to the company's plan..


I. 401k Plan Participant Limitation

-- Currently a 401(k) plan participant can elect to have up to $15,000 deducted from his or her earnings contributed to the 401(k). If the plan participant is 50 years or older, an additional $5,000 per year may be contributed. The amount the government allows be voluntary contributed by a worker has been steadily increasing over the past decade, and this increase in the limit is expected to continue.

-- Examples: (1) An employee joins the company's 401k and earns $10,000 for the year -- the entire $10,000 can be contributed to the plan by this employee. (2) An employee earns $2,000,000 and wants to contribute the maximum -- the maximum that this employee can contribute is $15,000.

II. 415 Limitation

-- The 415 limitation is an overall limit on the maximum amount that can be added to a 401k plan participant's account during the year from all sources. The 415 limit includes the employee's voluntary payroll deduction (which is limited to a maximum of $15,000), combined with any matching or profit sharing or other contribution(s) made into the participant's account by the employer. The current 415 limitation is equal either the employees total compensation for the year OR $44,000, whichever is less.

-- Examples: (1) An employee earns $10,000 and joined the companies 401(k). This employee contributes $2,500 to the plan, and employer matches the employee at 50-cents to the dollar contributed. The employer provides this employee with a $1,250 matching contribution. (2) An employee earns $2,000,000 a year and contributes the maximum amount of $15,000 to the 401k. The employer has a very generous matching program, wherein the employee will contribute $5 for every dollar contributed by an employee. The most that this employee can have contributed to the 401(k) is $44,000 despite the fact that the $15,000 voluntary contribution calculates to a $75,000 employer match.

III. 404 Limitation

-- The 404 limitation controls the maximum dollar amount an employer can contribute to the company's plan during the year. Employer contribution can be in various forms, including profit-sharing and matching contributions. The 404 limitation can not exceed 25% of the company's payroll (total amount of all employees' compensations), prior to an employee deferrals, with the following stipulations: The employees' compensations used in the calculation must be eligible to participate in the 401k, and wages in excess of $220,000 cannot be factored into the calculation.

-- Examples: (1) A company with 10 employees has an annual gross payroll of $1,000,000. No employee earns more than $2000,000 per year. The most that the employer can contribute to the 401(k) is $250,000 across all participants. (2) A company with 3 employees has a gross payroll of $600,000. Employee A earns $200,000, Employee B earns $250,000, and Employee C earns $150,000. The rule 404 calculation can only recognize the first $220,000 of Employee B's compensation, thus reducing the eligible payroll to $570,000 instead of $600,000.

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