Mary Beth’s Corner

The Art of Customizing 401(k) Plans

ERISA Services, General, Participant Services
April 17, 2025

At My Benefits, we specialize in designing retirement plans that are truly tailored—ensuring both plan sponsors and participants get the most out of their 401(k) experience. Every company has distinct priorities, and retirement plans should reflect those differences through customizable features. From eligibility criteria and contribution structures to vesting schedules and distribution options, a wide array of provisions can be adjusted to create an optimal plan. Below, we explore the key components that define a 401(k), offering clarity on available options to help businesses build a retirement program that balances flexibility, compliance, and employee satisfaction.

Eligibility

Eligibility provisions determine when employees can start participating in your plan. These rules set the minimum age, service requirements, and entry dates for new participants.

Age Options:
- No age requirement
- 18 years old (lowest recommended age requirement)
- 21 years old (highest age requirement)
Service Options:
- Immediate eligibility

- Any amount of time between date of hire and 1 year

- 1 year of service + 1000 hours in that 1 year (most restrictive)
Entry Date Options:
- Per Payroll (e.g., first day of each payroll period)

- Monthly (e.g., first of the month)

- Quarterly (e.g., January 1, April 1, July 1, and October 1)

- Semi-Annual (e.g., January 1 and July 1)

These options allow you to tailor when and how employees join your plan, balancing administrative simplicity with inclusivity.

Auto Enrollment

Auto enrollment automatically enrolls eligible employees in the plan, helping boost participation and retirement readiness.

QACA (Qualified Automatic Contribution Arrangement): Requires automatic enrollment and annual increases, paired with a safe harbor employer contribution.

EACA (Eligible Automatic Contribution Arrangement): Offers automatic enrollment with the option for employees to opt out and allows for certain refund provisions.

ACA (Automatic Contribution Arrangement): Basic auto-enrollment, available only for plans effective before January 1, 2023.

Auto enrollment can simplify savings for employees and help your plan meet nondiscrimination requirements.

Employer Contributions

Safe Harbor

Safe harbor provisions are employer contributions that automatically satisfy certain IRS nondiscrimination tests, making plan administration easier.

Basic Match: 100% match on the first 3% of pay deferred, plus 50% on the next 2%.
Enhanced Match: 100% match up to 4% of pay deferred.
QACA Match: 100% match on the first 1% of pay deferred, plus 50% on the next 5%.
Non-Elective: 3% of pay contributed to all eligible employees, regardless of participation.

Safe harbor contributions are always 100% vested* and can help ensure all employees benefit from the plan.

*If a Safe Harbor plan utilizes QACA, the plan sponsor has the option to add a 2-year cliff vesting schedule to the Safe Harbor employer contributions.

Discretionary Match

Discretionary match allows employers to decide each year how much to contribute, offering flexibility based on business performance.

Any Uniform Formula – for example:

- Percentage of Employee Contributions: 50% match up to 6% of pay deferred.

- Flat Dollar Amount: $1,000 per employee.

- Tiered Match: 100% on the first 2% deferred, 50% on the next 4%.

This flexibility lets you reward employees who defer into the plan while managing costs.

Discretionary Profit Sharing

Profit sharing is an employer contribution that can be allocated in several ways, allowing you to reward employees based on your chosen formula.

Pro-Rata: All eligible employees receive the same percentage of contribution based on compensation.
Integrated: Allocates more to higher earners by factoring in Social Security wage base.

New Comparability (Cross Testing): Employees are grouped (often by job class or ownership), and each group can receive different allocations, provided IRS testing is satisfied.

Profit sharing can be a powerful tool for attracting and retaining key talent.

Vesting Schedules

Vesting schedules determine when employees gain full ownership of employer contributions. Employee deferrals are always 100% vested immediately.

2-Year Cliff: 100% vesting after 2 years of service, 0% before.

3-Year Cliff: 100% vesting after 3 years of service, 0% before.

1-4 Year Graded: 20% vested after 1 year, increasing by 20% each year, fully vested after 5 years.

1-5 Year Graded: 20% vested after 1 year, increasing by 20% each year, fully vested after 6 years.

2-6 Year Graded: 16.67% vested after 2 years, increasing by 16.67% each year, fully vested after 6 years.

Choosing the right vesting schedule can help with employee retention and reward long-term service.

In-Service Distributions

In-service distributions allow employees to access their retirement funds while still employed, under certain circumstances.

Hardship: Permits withdrawals for immediate and heavy financial needs, such as medical expenses, education expenses, etc.

In-Service at Age 59½: Allows penalty-free withdrawals for participants who reach age 59½.

Loans: Employees can borrow from their vested balance, typically up to 50% or $50,000, whichever is less.

These features provide flexibility for employees facing financial challenges or life changes.

TPA = Tailored, Proactive, & Accurate

Designing a robust 401(k) plan requires strategic customization to align with a company’s unique goals while addressing the diverse needs of its workforce. By prioritizing tailored solutions, businesses can transform their retirement plans into competitive tools for talent retention, tax efficiency, and retirement readiness. For organizations seeking to elevate their benefits strategy, partnering with experts who understand these nuances is essential; My Benefits offers specialized guidance to translate complex provisions into actionable, compliant, and cost-effective plans. To explore how a customized retirement program can drive organizational success and employee satisfaction, contact My Benefits today for a consultation designed to meet any company’s unique objectives.