401K Plan Designs

1No Match, No Vesting - Be Wary of Top Heavy Rules
Employees can make elections to put their own money into the 401k, but the company will not match.

This plan may be problematic for "key employees". Key employees are any owners and corporate officers (i.e. people who have some legal control over the direction of the company).

The IRS demands that NO MORE THAN 60% of ALL 401K plan assets belong to "key employees". If only owners and highly compensated company officers are contributing to the 401K, that will be a problem! It is called a "Top Heavy" plan and requires paying professional fees to us or an accountant to fix it!
Top Heavy Plans

NOTE: IF ALL eligible employees are "key employees" / "highly compensated"... this plan design is NOT a problem!
2Safe Harbor 401K - Breathe Easy
If your company has many owners / highly compensated employees, you should consider a "Safe Harbor 401K". Participating employers must match the first 4% of employee 401K deferrals, dollar for dollar.

EXAMPLE:
An employee makes $5000 per pay period. If the employee puts away $200 each paycheck (i.e. 4% of salary), the employer MUST match that 4% (i.e. $200) into their 401K account. Any additional amounts do not have to be matched. HOWEVER, you will NOT be subject to "Top Heavy" & ADP/ ACP Testing! See below.

Safe Harbor 401K plans are also great for businesses with many owners and highly compensated employees. The complex 401K plan testing that prevents owners and highly compensated employees from utilizing a 401K plan, is automatically given a passing grade, allowing owners & highly compensated employees to fully participate in the 401K plan!

Vesting is immediate for safe harbor plans. Here's some INFO about safe harbor 401K programs. Keep in mind that nearly ALL of the administrative work is done for you with The Social 401K.

Please see below for our non-Safe Harbor Options.

EXAMPLE Safe Harbor 401K
33 Year Cliff Vesting with Fixed Matching
The employer / company sets a fixed matching schedule (see FAQ tab below for examples). The employer contributions are FULLY vested and the property of the employee after 3 FULL years of service. If an employee leaves employment having only worked 2 years and 11 full months... they are not vested at all. It is zero vesting until 3 FULL years of service. After 3 FULL years of service, all employer 401K contributions are the property of the employee.

IRS Vesting Schedule

This design is still subject to Plan Testing. See "FAQ" below. The idea is that with a company match, enough non-key employees will participate in the 401K that the plan will pass top heavy testing without having to install a full safe harbor plan.
46 Year Graded Vesting with Fixed Matching
The employer / company sets a fixed matching schedule (see FAQ tab below for examples). The employer contributions are GRADUALLY vested over time. When each new calendar year occurs... the employer funds are vested by an additional 20%. For Example:

  • Employee works 1000+ hours in all of 2020 = 1 FULL year of service. They enroll into the 401K because they are now eligible
  • Employee works 1000+ hours in all of 2021 = 2 FULL years of service. 20% of employer contributions are now legally theirs
  • Employee works 1000+ hours in all of 2022 = 3 FULL years of service. 40% of employer contributions are now legally theirs
  • ... and so on, adding another 20% each year until the end of year 6 when the employee is 100% vested.

    IRS Vesting Schedule

    This design is still subject to top heavy rules and testing. See "No Match, No Vesting" above. The idea is that with a company match, enough non-key employees will participate in the 401K that the plan will pass top heavy testing without having to install a full safe harbor plan.
  • 5FAQ: Types of Company Matching Schedules
    With all the above examples, the company / employer must still send the employer funds to the 401K trustee (i.e. bank). Vesting only effects who (and when) owns the employer contributions, it does nothing to effect company cash flows. Company cash flows into the 401K plan are determined by the company's matching schedule.

    Matching schedules can be very complex, but ultimately it is up to each employer to keep track of the accounting! Our Pooled 401K can help track this, but will require clean & accurate information from your payroll systems. To keep things sensible, our 401K platform only allows for a fixed matching schedule:

  • Employer will match $X cents for each $1 dollar that the employee contributes to the 401k plan. Employer will do this for the first X PERCENT of employee's salary / wages.
  • Employer will match $X cents for each $1 dollar that the employee contributes to the 401k plan. Employer will do this for the first $X DOLLARS of employee's salary / wages.

    We allow employers to match each dollar of an employee's contribution by a set number of cents (range can be 1 to 200 cents for each dollar). That match is then CAPPED to a percentage of salary, or a flat dollar amount.
  • 6FAQ: Who is a "Highly Compensated Employee"?
    As a general rule of thumb:
  • Any 5% (or greater) owner of the company
  • Any employee who has a gross income of over $130K per year (adjusted for inflation as of 2021)

  • ALL "key employees" (i.e. owners) are always "highly compensated employees"

    IRS: Identifying Highly Compensated Employees

  • 7FAQ: Why Safe Harbor? What Testing?!
    Highly compensated employees (HCE) cannot OUTPACE contributions into the 401K plan both in terms of VOLUME AND VELOCITY! Furthermore, in the LONG RUN... 401K plans cannot be "top heavy" (i.e. 60% of total 401K plan account balances in the company Plan cannot belong to key employees).

    Here's a detailed example of ADP & ACP discrimination testing: ADP & ACP Testing

    Back of the Napkin Summary:
  • DEFERRAL TEST: If regular employees / owners defer X% of their paycheck... THEN HCEs CANNOT put in more than X+2% of their "income" (however they cobble that "income" together) into the 401K.

  • COMPANY CONTRIBUTION TEST: If regular employees receive (ON AVERAGE) a 1% 401K match from the company... THEN HCE's cannot receive more than double what regular employees received (in this case 2% matching from the company bank account towards the 401K contribution).

  • TOP HEAVY TEST: The IRS demands that NO MORE THAN 60% of ALL 401K plan assets belong to "key employees". Key employees are owners and company officers (i.e. people who have legal power to control the company). So if the total account balance of all Key Employees is greater than 60% of ALL 401k account balances... it is a "Top Heavy" plan and must be fixed.

    While "top heavy" may not seem like a problem in year 1, consider the compounding effect of assets / money AND that key employees are usually owners & officers that don't leave the company. Regular employees come and go and roll out their 401K account balances into IRA's, leaving key employee account balances as the only remaining 401K assets. Top heavy can easily become a problem within a few years.