401K Administration

What You Need To Know About 401K Administration

The 401K plans are exempt from federal taxes.  In this manner, the government shows its support for the system and encourages retirement planning.

The 401K retirement system is an operation which is governed by the Employee Benefits Security Administration.  You’ve probably heard a lot about these plans because of the many advantages attached to them.  Aside from the employees’ contributions being tax exempt, employers’ contributions to such plans are equally tax exempt.

The 401K plan also allows for a lot of manipulability.  The employee will have control of his or her fund, investing it in various investment vehicles to compound the value of the fund until he or she reaches retirement age.  On top of that, the employer will add to the fund through a match contribution scheme.

If you’re running a company and you have your own set of employees, it might be worth your while to learn how to set up 401K plans and administer them.  If you’re running a large company, then you’d have the luxury of letting your own accounting department take care of the plans.  Nevertheless, it is still worth knowing how to set up and administer such plans.

401K plans require administration.  And when you speak of administration, you generally refer to employer’s compliance to the requirement of maintaining company contributions that do not favor any group of employees or exceed limitations on tax deductions.  It is important that companies strictly comply with these rules; otherwise, they’d be vulnerable to harsh penalties.

Different plans apply to different companies.  The plans that would suit one company may not be best for another.  Medium-size to large insurance companies, for instance, can relatively administer a complex group of plans, but these plans may not be advisable for smaller insurance companies.  Complex plans may be a tad expensive for small insurance companies.

What do you need to administer your company’s 401K plan?  There are a lot of requirements but basically these include:

1. Contributions and compliance testing
2. Developing and maintaining 401K fund balances
3. Payment of fund balances of terminated employees
4. Management of loans
5. Assistance in fund withdrawals
6. Preparation and completion of 401K plan forms
7. Reporting and disclosure of fund movement and balances to employees or participants

401K plans need to be properly administered.  You can do this yourself.  However, if you can afford it, it is highly advisable that you have your plans administered by a third-party firm specializing in the administration of 401K funds.

This firm must regularly review the plans and funds and the review must ensure that all the documents and reports are updated.  It shall also determine the effects that any corporate change has on the 401K plans.  It shall also ensure that participants are regularly updated.