By way of background, employees defer a portion of their salary into a 401(k) plan on a pretax basis to help fund their retirement. In addition to employee funds, business owners can also make contributions to these savings vehicles, and they are considered a tax-deductible business expense. These contributions can be made as a match to employee contributions, as a discretionary profit sharing contribution, or a combination of the two.

When considering 401(k) options for your business, there are two primary types – the traditional 401(k), and another known as a safe harbor 401(k). Before we go further and look at the difference between the two variations, it’s worth noting that, as of the beginning of 2006, some plans have also begun offering the ability to make salary deferral contributions on an after-tax basis – known as a Roth contribution. This is a provision that can be added to any 401(k), however, and should not be viewed as a third plan option.

Administering a traditional 401(k) requires you to perform what’s known as nondiscrimination testing on an annual basis. What this boils down to is a pair of tests that must be performed to make sure that both the amounts deferred by employees and the employer matching or profit sharing contributions to the plan do not discriminate in favor of business owners and other highly compensated employees. If not enough employees participate in their 401(k), contributions by owners and other executives to their own plans can be limited by these tests.

The safe harbor 401(k), on the other hand, eliminates discrimination testing. This arrangement allows highly compensated employees to maximize their salary deferral contributions – up to $15,000 per individual in 2006 – regardless of the participation levels of other employees.

After you’ve had a chance to review all the details, choosing a retirement savings plan for your company is only half the battle. With a program in place, it’s important to make your employees aware of it and encourage their participation. Unfortunately, for a variety of reasons, many employees choose not to participate in a 401(k). Some hindrances include not understanding plan benefits or investments, or even just the fear of being able to meet everyday living expenses on a smaller paycheck.
One way to increase participation is to hold employee meetings on the subject. These meetings are most effective when structured as part of an enrollment campaign.

Following are a few key elements to consider for a successful campaign.

For starters, you should schedule your campaign to coincide with annual raise or bonus time. This gives employees a timely reminder just when they have the funds they may need to contribute. In addition, you can hold educational meetings during working hours and make attendance mandatory by requiring employees to sign in. You should make sure to keep meetings brief and small, but allow for interactive discussion to help employees feel comfortable.
Helping your employees save for their retirement can benefit you as well as them, so take the time to find out more about your options with 401(k) savings vehicles.

Copyright January 13, 2007 by Copyright 2007 by Leonard F. Marzigliano III, AAMS

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