Beyond ensuring the plan document is amended in a timely fashion, now may be an ideal time to consider making discretionary design changes. Specific changes may include:

Adopting a safe harbor provision. A safe harbor provision will allow plans to automatically pass ADP/ACP and top-heavy compliance tests. This provision requires that the employer either 1) makes a 3% of compensation nonelective contribution or 2) makes a 100% match up to 3% of compensation plus a 50% match on the next 2% of compensation. These employer contributions are immediately and fully vested. Note that special rules apply if a safe harbor election is made during the plan year.
Adding a Roth deferral and in-plan Roth transfer. Plans have the option to allow participants the ability to contribute to a Roth account. These contributions are not tax deductible, but earnings accumulate tax free. Unlike Roth IRAs, there are no income limits to Roth 401(k) eligibility. Also, plans may allow participants the ability to make an in-plan transfer from their pre-tax account to their Roth account. The transfer would be taxed as ordinary income.
Adding the ability for participants to make after-tax contributions. Plans might consider allowing employees the ability to make after-tax contributions beyond the 402(g) limit of $20,500 ($26,000 for participants ages 50 and older). These contributions are funded from payroll, and the earnings grow tax deferred. Some plan sponsors have rebranded their after-tax feature as an emergency savings account. Provided in-service distributions are permitted, employees can take a distribution of their after-tax contributions, incurring taxes and potential penalty only on the earnings, if any. In many cases, taking a distribution of after-tax savings from a 401(k) may be more efficient than taking a hardship distribution, or seeking high-interest consumer credit products outside of the plan to meet immediate liquidity needs. Note that after-tax contributions are subject to ACP testing, even if the plan adopted a safe harbor provision.

Preapproved documents offer sponsors a convenient and cost-effective way to establish and operate a qualified plan. Although not terribly onerous, there are some administrative tasks, including compliance with the six-year amendment and restatement requirement. Advisors should ensure clients complete their amendments by the July 31, 2022 deadline, but also should consider this an ideal time to suggest alternative plan designs and features that may be appropriate for their clients' organization.

Instant Insights /

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