Must You Provide a 401(k)?

Given how ubiquitous 401(k) plans are these days, you might assume that they are practically legally mandated. The fact remains, however, that employers in the United States do not have any obligation to offer a retirement savings benefit to employees though many opt to do so now that employee pensions have all but disappeared.

What Is a 401(k)?

First, let’s take a step back and look at what a 401(k) is and what it isn’t. The name “401(k)” actually refers to the section of IRS code that authorizes this type of program: a cash or deferred arrangement (CODA). A CODA allows employee and employer contributions to a plan and allows for that income to be tax-deferred (not taxed until withdrawal).

A 401(k) is not the same as an employee pension or other defined benefit payout upon retirement. It also should not be confused with other retirement options like an Individual Retirement Account (IRA) or a simplified employee pension (SEP).

Providing a 401(k): Benefits for Employers

While retirement programs are not a required benefit, one of the main reasons employers opt to provide them is market competitiveness. Since it is a common benefit to provide, not doing so could put the company at a disadvantage in attracting top talent.

As such, a 401(k) program can also serve as a tool for employee retention if the program has better benefits (such as a higher employer match or quicker vesting schedule) than what the competition is offering.

It also has the benefit of lowering taxes for both the employee and the employer. This is because the income put into the 401(k) is not taxed when it is earned, and the employee simply must pay taxes on the withdrawals taken in the future.

Providing a 401(k): Caveats for Employers

While providing a 401(k) is a voluntary benefit an employer can choose to provide, once it is offered, it must meet strict legal guidelines in terms of how it is administered. For example, every 401(k) must have written plan documents, a trust for the assets, an accurate recordkeeping system, and a way to disseminate plan information to all participants. There are various legally-required notices and documentation that must be provided as well. If you’re going to set up a plan, be sure to research the plan fully to ensure you’re well-versed in what it entails, or consider using a third party to administer the plan and meet all legal obligations.

You’ll also need to meet all of the standards of the Employee Retirement Income Security Act of 1974, which establishes guidelines on minimum standards for participation, provides rules for how the funds are managed, and much more.

Besides legal guidelines to follow, employers should also be aware that there are a lot of decisions that go into the setup of a 401(k) program. From determining how much of an employer match to offer to choosing investment plan options, the setup can be an intensive process. It should not be overlooked that this can be quite time consuming.

Do you offer a 401(k) benefit to employees? Do you find that most employees take advantage of this benefit?

*This article does not constitute legal advice. Always consult legal counsel with specific questions.

About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.