Question

1. Read Ch.19 "Section 401(k) Plan" and answer the following questions via Microsoft Word, individual homework, bring a hard copy of your homework to Class for classroom discussion:

1. What kind of organizations can adopt Section 401 (K) plans?

2. Is the Department of Labor's new fiduciary rule likely to have a significant impact on how 401(K) plans are administred?

3. Can a one-person business (proprietorship or corporation) adopt an individual 401(K) plan for the owner?

Answer 1

1. A 401k plan can be adopted by any self employed business that would include a sole proprietorship, limited liability company, partnership, c corporation, s corporation etc. The business adopting this plan must not employ any full time employees that are eligible to participate in the plan other than the business partners & their spouses. A full time employee is one who works for at least 1000 hours in a year. Certain employees may be excluded from this like those who are under 21 years of age, non resident aliens & members for which retirement benefits were subject of collective bargaining agreement.
2. The Department of Labour’s new fiduciary rule will have some effect on the fees charged to IRA owners, but rollovers from a 401(k) plan are likely to remain higher than those charged by the plan. An important distinction is that a payroll deduction IRA will not have the same fee structure as a retail IRA as this is a group product with a simple structure and index fund investments. According to Munnell and Webb (2015), a leakage occurs when funds are permanently withdrawn from a 401(k) or IRA before retirement. Implementing this proposal would require that the IRS definition of “employee” change so that providing access to a retirement savings account, regardless of type, would not in itself make a contingent worker become an employee.
3. The business plan that can be adopted by these kinds of business are referred to as small business owner 401(k) or SBO 401(k). A common misconception about the SBO-401(k) is that it can be adopted only by sole proprietors. In fact, the SBO 401(k) plan may be adopted by any small business, including corporations; limited liability companies (LLC) and partnerships, provided that the only eligible plan participants are the business owners (or their spouses who are also employed by the business).