Because of recent tax law changes enacted by Congress, now is the time to review and implement changes that can increase the effectiveness of your company's employee retirement plan for 2007 without significantly increasing the after-tax cost of the plan for your company. Simple changes may allow you to increase contributions for owners and other key employees without significantly increasing contributions for all other employees. New plan provisions allow larger contributions to higher-earning employees while maintaining a reasonable level for rank-and-file employees. This type of contribution shifting would balance out the benefits provided by the retirement plan to more evenly reflect wage differences.
401(k) plans currently are the most popular employer-sponsored plans available and often the least understood. However, extremely low participation rates by many employees can reduce the effectiveness of a 401(k) plan for higher-paid employees. Internal Revenue Service regulations restrict the deferral rate of highly compensated employees to a maximum of 2 percent more than the average of all other employees.
Following are options for increasing plan effectiveness for employees in all salary ranges.