401k employer contribution

by not_mad_lad. Posted on Sep 16, 2020    2    3

I am currently buying a business and will have 1-employee (and hopefully more as I grow). I intend to start a new 401k for this business.

My question is about the employer contribution to the 401k. Does it have to be equitable?

By that I mean, could I give my employee something like 3% of their salary as a benefit but contribute whatever % to myself until I hit the max of $57k between employee/employer contributions (assuming that’s within the 25% cap)? Or does the employer contribution need to be the same salary percentage for both my employer and myself?


gooda_ 2

Upvoting because I would like to know too.

fstezaws 3

401k plans are defined benefit contribution plans and are highly regulated by law. You need a plan administrator (3rd party), fiduciary (you, or someone else), and a funds manager. Usually when you set up a 401k people help you with all of that.

I’ve done plans with Principal, but have recently switched to Guideline because its 100% automated with my payroll provider, Gusto.

I run a Safe Harbor plan that has lots of rules. We match 100% of the first 3% of compensation, and 50% of the next 2% of compensation (essentially 4% is the max contribution match if they contribute 5% of their compensation). You can max that out for yourself, but you have to treat everyone equally under a Safe Harbor plan. I don’t know what other types of plans there are, but this is a pretty common plan. Maybe the only type. Unsure. There are also vesting cliffs, participation requirements, and all sorts of plan details that you need to decide on to finalize your plan, and your plan administrator can help you with all of that.

I would reach out to a financial advisor or to Guideline directly and they can set that up for you. Guideline is a fairly low monthly fee but does have some setup fees.

At the end of the year you can do a Profit Sharing distribution that would allow you to max out your own personal contribution up to $54k a year (this includes your $19,500 and employer matches), but is dependent on your W2 salary to hit that maximum amount.

Hope this helps.

  not_mad_lad 1

Thanks for this! I was an LLC with no employees so had a solo 401k - so much simpler! You are right though, I have to talk to an advisor as now that I will have employee(s), it’s much more complicated.

I hadn’t heard of Guideline before, so appreciate the recommendation - I’ll check them out for sure!