Common 401(k) Questions to Expect from Your Employees

Your company has decided to take advantage of tax reform by offering employees the first-ever 401(k) plan in company history. Good for you. Studies show that retirement plans are good tools for recruiting and keeping the best talent. But this benefit will come with questions your HR and payroll departments should be prepared to answer.

At BenefitMall, a Dallas company that offers its payroll clients an innovative 401(k) solution, they believe it is important for both employers and employees to fully understand all the ins and outs of any retirement plan before embracing it. Your company may have a plan in place, but do not expect workers to participate without answers to their questions.

To get your company started, here is a list of the most common 401(k) questions you can expect from your employees in the coming months:

What will my contributions be?

How much individual employees contribute to their 401(k) plans is really up to them. Your plan likely has a minimum target, say 10% to 15% of gross earnings, but employees will have an opportunity to contribute more. Your plan may even allow them to contribute less. Here’s the point: answering this question means redirecting employees to the language in the plan itself. It spells out both employee and employer contributions.

How much does the employer contribute?

Nearly every 401(k) plan involves some sort of employer contribution. Some employers fully match employee contributions dollar for dollar. Others choose to only match a certain percentage. Whatever your company has decided on is what applies to your employees. That may be different from other plans offered to their spouses or partners.

Will plan contributions reduce my taxes?

One of the benefits of saving in a 401(k) is that the money contributed is pretax income. In other words, the amount of money put into the plan is not subject to income tax in the year it is earned. This is good in the short term, but there are implications for the long-term that many people don’t know. Money withdrawn from the plan at retirement is subject to income tax. That means that the government is taxing not only what was contributed, but also what was earned by the plan itself.

What does it mean to be vested?

Vesting is something that confuses a lot of people. Here’s how it works: every penny an employee contributes to his or her 401(k) plan will be returned when the plan is liquidated. That’s not necessarily true of employer contributions. Vesting is essentially the formula that determines how much of the employer contributions become employee property at any given point in time. If an employee is 50% vested, he or she will receive 50% of the employer’s contributions should he/she liquidate at that time.

The idea behind vesting is to encourage employees to stay in a plan for as long as possible. If an employee can hold out until he or she is 100% vested, he/she would receive more money in his/her plan than if he/she bailed at 50%.

Would an IRA be a better deal?

Comparing a 401(k) plan to an IRA is a legitimate exercise a lot of people undertake. Both kinds of plans have their benefits. As to whether an IRA would be better for your employees, only they can answer that after consulting with a financial advisor. There are some cases where an IRA would be better.

Your company has decided to offer a 401(k) plan beginning this year. Well done. Now make sure you have the right information at hand to answer any questions your employees might have.

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