Should You Offer A 401(k) Plan To Your Employees?
There’s no question that finding good employees for your CNC shop is challenging – as is holding onto them. Employees leave companies for a variety of reasons including uncertainty about their financial futures, particularly their ability to someday retire comfortably. One way to relieve this concern is to establish a 401 (k) plan. The IRS has specific guidelines for such plans, but in general here’s how they work:
- Your company sponsors the plan, enabling your employees to put pre-tax earnings into mutual funds or other qualified investments that can grow over time to fund their retirement.
- Employers have the option to match the employee’s contributions, though not necessarily on a dollar-to-dollar basis. For example, for each dollar the employee invests, the company may contribute 50¢.
- These plans are governed by ERISA (the Employment Retirement Income Security Act of 1974), a federal law that protects the employee’s interests and instills confidence in the security of the plan.
- Many employers use an outside professional administrator to manage the plan. Although this means paying a fee for their services, it also relieves you of managing compliance and provides financial expertise for the plan participants.
- For 2017 the maximum employee contribution is $18,000. Those age 50 or older can add an additional “catch up” amount of $6,000. The maximum allowable contribution (including deferred compensation and employer matching) is $54,000 or $60,000 for those age 50 years or older.
- Traditional 401 (k) plans enable the employer to require that the employee remain with the company for a set length of time before becoming vested (being allowed to take the employer’s contribution with them if they leave). On the other hand, Safe Harbor 401 (k) plans vest employees as soon as they and the employer make contributions.
- There is also a Simple 401 (k) plan for employers with fewer than 100 employees, and a Roth 401 (k) that allows contributions of after tax dollars, thereby eliminating income tax on the contributions when withdrawn. Visit the IRS Web site for details on how these plan variations work.
- Like other deferred retirement plans, there is a penalty for withdrawals prior to age 59 ½.
- There are other types of employer sponsored retirement plans, including profit-sharing plans that are fully funded by the employer, however the 401 (k) plan is the most widely used.
If you decide that a 401 (k) plan is a good way to retain and reward your loyal employees, consult with trusted financial advisors to make sure you choose the plan that best fits your CNC shop.