Common plan design considerations

When working with your financial advisor and third party administrator (TPA) to create a retirement plan, there are several considerations:

  • What is the purpose of the plan?
    • Tax savings
    • Retirement readiness for owner(s) or other staff members
    • Employee benefit

Ideally, a retirement plan covers all three of the above goals, but some weigh higher than others. Given these goals, a plan design analysis should be put together that shows, given your current census data for the company, what contributions might look like given a certain design. Contribution types and sources available would be written into the Plan Document.

Other items that go hat in hand with these considerations (and are also written into the Plan Document) are the following:

  • Eligibility
  • Vesting
  • Distribution options


Eligibility conditions for most money types in a 401(k) range from immediate upon hire to requiring age 21, 1 year of service in which an employee working 1,000 hours and entry semi-annually (for a calendar year plan, this would be January 1 or July 1). Some employers may have a strong preference for a certain eligibility condition because of their industry, competition or other considerations.


Depending on the money source, vesting can be 100% immediately on all sources up to 6-year graded (e.g., for each year a participant works at least 1,000 hours, the participant vests: year 1 would be 0% vested, year 2 20%, year 3 40% year 4 60%, year 5 80% and year 6 100%).

A brief summary of money types shows what is possible:

  • Must be 100% vested at all times: Deferrals, Rollovers, Safe Harbor contributions (non auto enroll)
  • May be up to 2-year cliff: Qualified Automatic Contribution Arrangement (QACA) Safe Harbors for auto enroll either match or non-elective
  • May be up to 3-year cliff: Cash Balance plans
  • May be up to 6-year graded: Profit Sharing and discretionary matches (in 401(k)s) and Defined Benefit plans

Unvested funds may be used to fund future employer contributions or to pay plan expenses.


Plan Sponsors often have strong options about distribution options available within qualified plans. Depending on goals and plan types, we have recommendations as well. Common considerations are the following:

  • Allowing distributions upon termination of employment
  • Allowing hardship distributions (generally, meeting the IRS’ Safe Harbor conditions for granting a hardship)
  • Allowing in-service distributions (generally, after age 59-1/2)
  • Allowing loans for plan participants

This is a very brief guide meant to start the conversation about how to craft your plan. And remember, these options can always be amended later on. Talk with your TPA about timing of amendments.

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