Employer contribution

[Guest massarrat]

Does the employer have a choice whether or not to contribute in a 401(k) plan, and what are the pros and cons of contributing?

[Ervin Barham]

A 401(k) plan can be established with deferrals as the only source of contributions. The Employer can have discretion whether to match or make any other type of contribution. However, if the plan becomes top-heavy, an Employer may be required to contribute a minimum of 3% of compensation for all non-key employees.

A good question to ask the Employer is why they want to establish a 401(k) plan. The answer will go a long way to making that call. As a rule, most Employers will provide some sort of matching, even if it's discretionary.

Also: (1) Will the employees participate if the employer does not contribute?

(2) Are the key employees going to contribute?

(3) Is the company profitable enough to make a contribution?

With a little research, you should be able to find a good article that talks about this. If you have access to a tax service like CCH or RIA, you may find some good material to use.

Good luck.