401(k) Frequently Asked Questions

General 401(k) Questions

What is a 401(k) plan?

A 401(k) is a retirement savings plan offered to employees by their employers. This employer-sponsored plan is one of the most common retirement plans in the U.S., allowing workers to save and invest a portion of their paycheck before taxes are taken out.

A 401(k) plan offers many benefits similar to other retirement plans, serving as a means for participants to set aside funds from their salaries for their retirement years. Employers often match a percentage of employee contributions, further enhancing the growth potential of the savings. This matching aspect not only encourages employees to participate but also boosts their retirement savings. Contributions, as well as any matching funds and earnings, are allowed to grow tax-free until withdrawal.

With a 401(k) plan from Ubiquity, employers can easily set up and manage a retirement savings plan that delivers four significant benefits:

State Law Compliance: Meets all state mandated requirements for small businesses to offer retirement plans.
Tax Advantages: Small businesses can receive tax deductions for the contributions they make to their employees’ 401(k) accounts. Additionally, there are tax credits available to small businesses that set up retirement plans, which can offset the costs of starting and administering the plan.

Attracting and Retaining Talent: A 401(k) plan can make a small business more competitive in the job market. Many skilled and experienced professionals look for comprehensive benefits packages when job hunting. By offering a 401(k), small businesses can attract higher-quality candidates and reduce turnover, which in turn can lead to reduced recruitment and training costs.
Enhanced Retirement Savings for Employers: Small business owners, like their employees, also need to plan for retirement. By establishing a 401(k) plan for their business, owners have the opportunity to contribute significantly to their own retirement accounts. As both an employer and an employee of the business, they can make both elective deferrals and profit-sharing contributions, potentially maximizing their annual contribution limits. This can accelerate the growth of their retirement savings, ensuring that they are better positioned for a comfortable retirement.

How does a 401(k) plan benefit employees?

A 401(k) plan allows employees to save and invest for their future. The contributions are deducted before taxes, reducing taxable income. Some employers also offer matching contributions, boosting the savings potential.

How does an employer set up a 401(k) plan?

By partnering with a firm like Ubiquity, employers can easily establish and manage their 401(k) plan, ensuring seamless and transparent processes.

What are the contribution limits for a 401(k) plan?

Contribution limits are determined by the IRS and are subject to change annually. Refer to the IRS website for the most recent limits.

Can employers match an employee's contribution?

Yes, employers can choose to match contributions up to a certain percentage, although they’re not required to.

How are 401(k) investments taxed?

Contributions are made pre-tax, which lowers your taxable income. Yet, when you withdraw in retirement, those distributions are taxed as ordinary income. Meanwhile, Roth investments remain tax-free, provided they meet all distribution criteria.

Do I have any recordkeeping or reporting obligations with a Ubiquity 401(k)?

With Ubiquity, you can choose to manage your 401(k) plan yourself, or Ubiquity can handle that for you.

Here is what you need to keep track of:

Contributions: All contributions into the plan.
Withdrawals: Withdrawals from the 401(k) plan (excluding loans) must be reported on a Form 1099-R and sent to the IRS. Form 1099-R is not required if you take a loan. We prepare a 1099R for your convenience.

When is the deadline to start a 401(k) plan?

You can establish a plan up to your initial tax filing deadline for the respective tax year. For instance, a corporation aiming to open a plan for 2023 should do so by the March 15, 2024 tax deadline. To guarantee timely document preparation, it’s wise to start the process early.

401(k) Contributions

Can I increase or decrease my contributions?

Yes, participants can typically change their contribution rates during specified periods, or during your company’s open enrollment.

How often should I review and adjust my contributions?

It’s advisable to review your contributions at least annually or whenever you experience a major financial or life change.

401(k) Investments

What investment options are available within a 401(k)?

Options vary, but can include mutual funds, stocks, bonds, and more. It’s essential to review your plan’s offerings and seek advice if necessary.

401(k) Hardship Withdrawals

What is a Hardship Withdrawal?

Taking money from your account to help cover expenses during a hardship. The IRS defines eligible 401(k) hardships as “immediate and heavy financial needs.” These needs generally include medical care, tuition, emergency home repairs, funeral costs, and eviction prevention.

Can I take a hardship withdrawal from my 401(k) plan?

Yes, most 401(k) plans allow hardship withdrawals provided that certain criteria are met.

The amount of your hardship withdrawal is limited to the amount you need to meet the immediate hardship, including taxes and penalties. This is illustrated by your supporting documents. Be aware that these withdrawals are subject to taxes and possible penalties.

What documentation is required?

The amount of your hardship withdrawal is limited to the amount you need to meet the immediate hardship, including taxes and penalties. This is illustrated by your supporting documents such as medical expenses, foreclosure notices, etc.

What are the tax consequences of taking a hardship withdrawal?

A hardship withdrawal is a taxable event. The money you take from the plan is taxable in the year in which it is taken. Also, if you are under the age of 59 ½, you may be subject to a 10% early withdrawal penalty.

Roth 401(k)

What is a Roth 401(k)?

A Roth 401(k) is a hybrid between a Roth IRA and a 401(k) plan. In a Roth 401(k), earnings on after-tax contributions grow tax-free, just like a Roth IRA. However, the contribution limits in a Roth 401(k) are significantly higher than a Roth IRA — $22,500 ($30,000 if age 50 or older) in 2023, compared to $6,500 for a Roth IRA.

Can my plan offer only Roth contributions?

No. To provide for Roth contributions, a 401(k) plan must also offer pre-tax contributions. All profit-sharing contributions are pre-tax.

Can distributions from a Roth account be rolled over?

In general, you can roll over your Roth 401(k) to another Roth 401(k) or a Roth IRA. If you want to roll your money into another Roth 401(k), you should first make sure the receiving 401(k) plan can accept it.

Do Roth contributions need to be reported separately from wages, tips, and other compensation on the Form W-2?

Yes. Contributions to a Roth account must be reported separately in box 12 of the Form W-2: “Wage and Tax Statement.”

Can I recategorize contributions and transfer them out of my Roth 401(k)?

No. Once an after-tax Roth contribution is made it is irrevocable and cannot be re-categorized as a pre-tax contribution.

How much may I contribute to my Roth account?

The combined amount you may contribute to a retirement plan is limited to $22,500 for 2023 ($30,000 if you are age 50 or older). Your individual contributions can be pre-tax, after-tax Roth contributions or a combination of both.

Maximum employee elective contribution (age 49 and younger)

$22,500

Maximum employee elective contribution (age 50 and older)

Additional $7,500

Maximum employee elective deferral plus catch-up contribution (age 50 or older)

$30,000

Defined contribution maximum limit, employee + employer (age 49 or younger)

$66,000

Defined contribution maximum limit (age 50 or older), all sources + catch-up

$73,500

Highly compensated employees’ threshold for nondiscrimination testing

$150,000

Key employee officer compensation threshold

$215,000

Annual compensation limit for HCEs and key employees

$330,000

Can I make both pre-tax contributions and Roth (after-tax) contributions in the same year?

Yes, if you adhere to the maximum contribution limits. Your contributions can be pre-tax, after-tax Roth contributions or a combination of both in the same year.

Getting Started

Can part-time employees participate in a 401(k) plan?

Eligibility for part-time employees hinges on the company’s policies. While some companies extend 401(k) options to part-timers, others set hourly requirements. However, part-time employees consistently working 500 hours annually over three consecutive years gain eligibility to defer.

How long does it take for a 401(k) to be active once initiated?

Typically, it takes several weeks for a 401(k) plan to become active. However, with firms like Ubiquity, the process can be streamlined and expedited.

Can I transfer my old 401(k) to a new employer's plan?

Yes, many plans allow you to roll over your old 401(k) into a new one, which can simplify your financial landscape and potentially offer better investment options. It’s crucial to understand any associated fees or requirements.

For more intricate queries, always consult with an expert or reach out to the Ubiquity team for specialized assistance.

FAQs about 401(k) Plans