What would my 401(k) plan look like? How would it operate?

1. To eliminate errors in failing to enroll employees, your plan would allow every employee to participate immediately. There would be no excluded classes except certain union employees, no age requirement, and no waiting period. Everyone is eligible to start deferring effective as of their 2nd payroll date.
    
2. We will transmit plan contributions to the investment company for you by direct debiting your company account. This will ensure timely deposits to avoid penalties and automate the process for you.
    
3. The plan would be what is called a "Safe Harbor Plan". This eliminates top heavy testing with its accompanying top heavy minimum requirements, as well as discrimination testing for deferrals and matching contributions. You do this by making one of two types of safe harbor contributions.

   If you want to treat all of your employees the same, whether they choose to defer or not, then you want the non-elective contribution which goes to everyone. The minimum is 3% and the maximum is 6%.

   If you want to only give contributions to those who choose to defer, then you want the matching contribution. The minimum is dollar-for-dollar on the first 3% deferred and fifty cents on the dollar for the next 2% deferred. This works out to 4% for those who defer 5% or more. An alternative, simpler minimum is dollar-for-dollar on the first 4% deferred. You may go as high as dollar for dollar on the first 6% deferred.

   The match is less costly than the non-elective in most cases because most plans do not have 100% enrollment by the employees. Remember that you also receive the safe harbor contribution, along with any family members in your business.

   The IRS only allows us to count compensation up to $245,000 for 2011. The maximum deferral is $16,500 if you are not 50 years old by 12/31/2011 and $22,000 if you are. So let's suppose that you make $245,000 in W-2 wages or more and that you are 50 years old. If you defer $22,000 and you choose a 3% safe harbor formula, your total contribution will be $29,350. If you choose a 4% formula, your total will be $31,800. If you choose the maximum 6%, your total will be $36,700.

4. There will be no other contributions allowed in your plan in order to keep it simple and avoid other testing issues.
    
5. When employees terminate, they will be eligible to take out their money in a lump-sum only. They may choose to roll it over to an IRA, or take it and pay the taxes.