401(k), 403(b), 457

The most common types of employer-sponsored retirement savings plans are called 401(k), 403(b) or 457 plans – so named for the Internal Revenue Service tax codes that govern them. Each has a different target audience:
  • 401(k) plans are offered to employees of public or private for-profit companies.
  • 403(b) plans are offered to employees of tax-exempt or non-profit organizations, such as public schools, colleges, hospitals, libraries, philanthropic organizations and churches.
457 plans are offered to employees of state and local municipal governments (and some local school and state university systems).

These plans have many features in common, although contribution limits, vesting schedules for employer-matching contributions, investment options and other details may differ, so be sure to read the plan documents for your particular plan carefully.
How do 401(k) Plans Work?
With a regular 401(k) plan, money is deducted from a participant's paycheck before taxes are withdrawn, which lowers their taxable income and therefore, lowers their taxes.
In addition, many employers have begun offering Roth 401(k) plans, which combine the features of a regular 401(k) with those of a Roth IRA. With a Roth 401(k) a participant contributes after-tax dollars. Although they don't get an upfront tax break, their account grows tax-free and withdrawals aren't later taxed, provided they had the account at least five years and are age 59 ½ or older – or have become disabled or die.
Eligibility for Participation
Some employers apply a waiting period before an employee can begin participating in their 401(k) – anywhere from one month to one year – while others allow employees to begin making contributions immediately. Also, it's not unusual for an employer to wait until an employee pass a similar waiting period before it will begin making matching contributions to your account. We will help you determine the best eligibility for your plan.
Contribution Amounts
The IRS sets a maximum amount a participant can contribute to a 401(k) plan in any given year and it is usually adjusted upward to account for inflation. For 2016, this limit is $18,000. In addition, employees over age 50 can also make "catch-up contributions" of up to $6,000 above and beyond the maximum amount.
Employer Matching Contributions
Although not required to by law, many employers match a portion of the contributions employees make to their 401(k) account. These matching contribution amounts vary widely from employer to employer.
Compliance Testing is required for 401k Plans
The ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) tests compare the average of salary deferral and employer match percentages for highly compensated employees (HCE) to the average of salary deferral and employer match percentages for non-highly compensated employees (NHCE).
To perform the ADP test, a salary deferral percentage is calculated for every eligible employee. The numerator is the amount of salary deferred by the employee. The denominator is the employee's pay before salary deferral. The employees are then grouped into HCE's and NHCE's. The percentages are added together and an average is calculated. Eligible participants who did not contribute to the plan are included as zeros.
Once the averages have been calculated, the HCE average is compared to the NHCE average. As a general rule, the HCE average cannot exceed the NHCE average by more than 2%. There are more restrictive rules if the NHCE average is less than 2%.
If the tests are not satisfied, a correction must be made. There are two ways to correct a failed ADP or ACP test. The employer can make a contribution to the plan to raise the NHCE average so that the test passes or return a part of the HCE's contribution to lower the HCE average so that the test passes. The best method to use depends on the individual circumstances of each plan. The Plan Administrator is responsible for deciding which method is to be used to correct the test.
The ADP/ACP test can be avoided with a Safe Harbor 401k design.