Hands-On Management: April 1997, 401k Plans Are Easier Than Ever To Manage

A strong employee benefits package can make a big difference in attracting and retaining employees. The loyal, long-term employees are the ones to whom such benefits are the most important.

A key part of your company’s benefits package can be a 401k plan. Many lawn and landscape business owners do not have a 401k because they think it is too expensive, too complicated or unworkable at their companies. In the past, that was true for most companies with 10 or even 50 employees.

OFFERING THE SIMPLE 401K. However, in August of 1996 as part of the Minimum Wage Bill, Congress introduced a new version of a 401k plan called the Simple 401k.

This is available to any company with less than 100 employees and is designed to remove the obstacles that are inherent in a traditional 401k. The Simple 401k is easier to administer for small business owners because they aren’t required to do all the testing that is necessary in a traditional 401k.

BASIC RULES MADE EASY. The basic rules for a Simple 401k come down to the following:

• Each employee may contribute up to $6,000 to the plan on a pre-tax basis.



• The employer can make a matching contribution of 100 percent, up to 3 percent of compensation ($1 for each $1 an employee contributes). This match can only be given to employees who make their own contributions.

  An alternative is that the employer may contribute 2 percent of compensation to all eligible employees, regardless of whether they choose to contribute for themselves.

• All employer and employee contributions will always be 100 percent vested.



• Just like a traditional 401k, the employer may establish age and years of service requirements for eligibility.



• Loans and hardship withdrawals are available.



• In traditional 401k plans, the business owner’s personal contribution is based on the amount other employees contribute. A Simple 401k doesn’t require the complicated testing associated with a traditional 401k. The owners may contribute up to the maximum for themselves without worrying about limitations.

TRADTIONAL 401K PLAN CHANGES. In addition to introducing the new Simple 401k, Congress also made some other changes that will make it much easier for a small company to establish and operate a traditional 401k plan. The key changes that are likely to affect small businesses are:

• Rules requiring special treatment for family members (Family Aggregation Rule) have been repealed. Traditionally, the owners of small, family-owned businesses have had great difficulty saving enough for themselves in 401k or other retirement plans due to this rule. Owners and family members of small businesses will now have the opportunity to save more for themselves.



• The definition of a highly compensated employee has been changed — it now includes only 5 percent of the owners of a company or employees making more than $80,000.

This should make it easier for employees to contribute more, and it should help the plan pass the test more easily.

All of these changes will help you establish and operate a 401k plan more easily, with the additional advantage of offering a more complete benefits package for your employees.