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FAQs about 401k Plan Design

Are you among the 61% of employers that offer a 401(k) plan to attract and retain top talent? As your company’s plan administrator or HR contact, you know from the level of interest shown that retirement planning is a perennial hot topic for U.S. workers. 

Although most people have heard of a 401(k), many are still confused about how they operate. Below are the most frequently asked questions that will help you better understand the rules related to 401k plan design: 

When can I join the company 401(k) plan?

Employee eligibility requirements vary company to company, but here are the maximum age and time limits under law: 

  • 21 years old with one year of service (employment at the company) to sign up for plan. 
  • 21 years old with two years of service to be eligible for discretionary employer contributions. These are additional contributions, such as profit-sharing, made by the employer at the end of the plan year.

How do you measure service for the purpose of 401(k) eligibility?  

Employers measure service two basic ways: 

Elapsed time method –Service based on time of employment—days, weeks, months, years. The number of hours worked is irrelevant. 

Counting hours method – Service based on number of hours worked during the Eligibility Computation Period. This ECP may not exceed 12 months or require more than 1,000 hours of service. 

Service requirements often vary for part-time, seasonal, and transient employees (longer wait times) and those considered the company’s top talent (shorter waits). 

What is the contribution limit for my 401(k)?

According to the IRS, the maximum employee 401(k) contribution limit is $19,000 ($25,000 for those over 50) for the 2019 calendar year. 

What is the company match for my 401(k) contributions?

Many companies encourage retirement saving by matching employees’ 401(k) contributionsMatching is not mandatory, however, nor does it mean that an employer must match workers’ contributions dollar-for-dollar. Companies make their own formula, most often by matching employee contributions up to a percentage of annual income.


Here is a typical scenario based on the median employer match (3%) and the median U.S. household income ($61,372): If you, as an employer, match up to 3% of your employee’s salary, that’s a $1,841 annual match. 

Financial planners typically encourage employees to contribute to their 401(k)s at a level that will at least trigger the employer match (free money!) But that is not a mandatory ceiling. The IRS limit for total annual 401(k) contributions in 2019 (including both employee and company contributions) is $56,000 or 100% of the employee’s salary, whichever is less.  

What is vesting and how long does it take?

Your 401(k) plan’s vesting schedule dictates the degree of ownership your employees have over your company’s contributions to their accounts. A typical schedule gives employees a percentage of ownership that increases with their tenure. The average number of years for being fully vested is five. If workers leave the company or are terminated before they are fully vested, they forfeit some or all of the company contribution. All employee contributions are immediately fully vested, remain so at all times, and cannot be forfeited.  

What can I do with the 401(k) from my previous job?

Employees have several options for how to handle their retirement savings when they switch jobs: 

401k-PlanLeave intact the 401(k) from the previous job – Workers may not want to disturb carefully chosen investment options if they’re producing sound benefits. Employees should be aware, however, that not all employers permit former workers to stay vested in their 401(k). Also, employees can no longer make contributions once they leave the company. 

Make a direct rollover from the old plan to a new plan – Your new employees can rollover all or part of the funds distributed from their previous plan directly into your company 401(k). This option is generally considered the easiest for avoiding taxes and penalties. 

Make an indirect rollover – In this scenario, an employee receives a check for the balance of the old 401(k) account made payable to that person. The employee is completely responsible for moving the assets into your plan or an IRA within 60 days or be subject to taxes and penalties. 

As you advise new employees on their options, be aware that the details of 401(k) regulatory requirements are often complex and can have a major impact on your business’s and employees’ finances. To go beyond the basics, feel free to contact the small business 401(k) experts at FJY to help you chose a plan that works for both your company and your valued employees.