SPC Help Center

Starting in 2025 - Almost all 401k plans require Auto-Enroll provisions with a permissible withdrawal feature.

Exclusions:

- If your business is less than 3 years old, you can wait until your 4th year
- If you "regularly employee" less than 10 employees, you do not have to add auto-enroll

What is auto-enroll? The US Government wanted to spur more savings for participants, so they mandated Auto-Enroll for new 401k and 403b plans in 2025. When a participant becomes eligible for the plan, if they do not choose a deferral $ or % for themselves, the Plan Sponsor (company) will automatically enroll them into the 401k at a minimum of 3% of their annual pay and gradually increase each participant each year until they reach 10% of pay. 

Each participant has a choice to defer an amount they wish, up to the annual limit, but this provision catches every participant who did not make a positive election for themselves ($0 annually is an acceptable amount for a participant to select). This would increase savings rates for employees. 

There are several options for auto-enroll and several potential issues. Contact SPC today to learn more about auto-enroll provisions and how it might affect your staff and plan overall.

The government says if a Plan Sponsor (company) offers a minimum level of benefit to their staff, they can avoid most annual testing rules. This is called "Safe Harbor". A safe harbor 401k plan avoids the ADP/ACP annual testing as well as Top Heavy and some other potential discrimination rules.

Safe Harbor comes in many flavors:

- 3% Non-Elective - everyone who is eligible for the plan will automatically receive 3% of their annual pay as an employer contribution. This could also be 4%, 5%, or even 6% of annual pay.

- Safe Harbor Match  - several different match formulas. When participants become eligible, they would receive a match up to 3.5% or up to 4% of their pay as a company match, depending on the formula.

Most Safe Harbor formulas are 100% immediately vested (meaning the participant would take the money with them if they left the company), but there are several versions which can include a 2 year vesting period for companies with higher turnover.

Payroll-Taxable Income is the key. Earned Income is the technical term. For retirement plans, we can only use income which is subject to both Income Tax & Payroll Tax (or self-employment tax). What does this mean in plain English?

- Sole Prop - Net Schedule C/Net Schedule SE Income
- S-Corp - Box 1 or Box 5 of W2 Income (S-Corp K1 income does not count)
- C-Corp - Box 1 or Box 5 of W2 Income (Dividend income does not count)
- Partnerships - Box 14a on the Partnership K1 (Passive income does not count)
- 1099 Contractor Income - Net Schedule C/Net Schedule SE

*LLCs are not a taxable entity, so when considering a retirement plan for an LLC, you might confirm your taxable entity type with your accountant or CPA. Every LLC will generally file as one of the 4 main enitity types listed above. 

There are multiple types of Profit Sharing Formulas, but the most common types are Pro-Rata and New Comparability. What's the difference?

ProRata - Everyone who is eligible to receive the Profit Sharing will receive the same % of pay. (The same as a SEP IRA). If the owner wishes to give themselves 10% of pay as profit sharing, all of the eligible employees will also receive 10% of their own pay as a company profit sharing contribution. This requires very little compliance testing, but is very inefficient when trying to maximize benefits for ownership.

New Comparability - Each eligible participant is in their own class. Owners can receive outsized benefits compared to the staff - or - individual employees can be called out for specific profit sharing amounts. This obviously requires more compliance testing, but is the preferred method for customized plans to single out individuals, groups, owners, or company locations for varied amounts of benefits.

How do you know how which formula you plan adopted? It's in your plan document. SPC is here to help if you would like our team to review your document for recommendations to make your plan more effective for your goals.

Yes. All 401k Plans can add a Discretionary Match provision to their plan document. The most important item to consider is how to write the amendment.

A Fixed Match would actually write a fixed formula into the document, which could be dangerous for the company if they wish to change the match formula from year to year. A Safe Harbor Match is a version of a fixed match (the match formula is included in all participant materials). With a Fixed Match however, the company could add up to a 6 year vesting schedule to help with employee retention.

A Discretionary Match might be a better option if company flexibility is key. A discretionary match can be written in such a way that the actual formula is determined after the end of the year once the final year-end company financials are completed. Then, working with a plan consultant or TPA, the company can determine how much of a match they would like to offer for the prior year. Are their other rules to consider, yes. However, Adam, our Managing Director, likes to call this a "surgical option" for custom plans where the company would like to target a specific tax deductible amount or wait until they are able to confirm the total plan participation before setting a formula for the year. SPC specializes in this type of custom plan design to maximize your flexibility.

What is someone is terminated or leaves the company during the year? If the company offers a discretionary match or profit sharing for the year, would we have to offer this additional benefit to employees who are no longer actively employed? Perhaps not. 

A Last Day Rule for discretionary matches and profit sharing stipulates that anyone not employed when the plan year calendar rolls over (generally Dec 31 to Jan 1), would not share in the additional benefit. This allows the company to reward only those employees who are still employed with the company. Obviously, there are rules around this, but in most cases for 401k Profit Sharing plans, it could be a valuable provision to add to your plan.