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Defining a 401(K) Plan
Company Level Code defining Employee 401K Contribution (Percentage Based)
The XYZ Company offers their Employees a 401K Plan as follows:
Three Company Level Codes are required to automate the 401K plan as described above:
NOTE: The numbers assigned to these Codes (600, 601, 602) are assigned by the user who creates the Codes. Please use Code ID numbers between 500 and 999 for deduction type codes. Every Code is first created at the Company Level, with an Employee # of zero. The Company Level code allows the user to define certain aspects of the Code to be shared by all Employees who utilize the code. These areas are not editable at the Employee Code Level. (See the picture below -- all disabled fields are data that can only be set at the Company Level.) In the above picture, we are browsing Code 601. Let's examine it in some detail: We have chosen to use the number 601 to define Employee 401(K) percentage-based contribution. We have set the Category to "4" -- 401K EMPLOYEE and the Type to "02" -- PERCENT OF GROSS. We have unchecked the Federal, State and Local W/H checkboxes, since the 401K is a pretax deduction as far as these withholdings are concerned. We have not checked the Global checkbox, since not all employees of the XYZ Company are eligible for the 401k Plan. Lastly, notice that we have set the Amount, Limit and Balance to Zero. These values will be overridden on an employee-by- employee basis by Employee Level Codes. An example follows.
Employee Level Code (Employee 50663) defining 401k Contribution for Mitchell, Lonnie K.
When a Code needs to be further defined for individual employees, an Employee Level Code is created. The above image shows the definition of the Employee Level Code for Lonnie K. Mitchell. Notice that many of the fields are disabled. These values are defined at the Company Level, and are then shared by all Employee Level Codes. Two of the enabled fields, Amount and Limit, are of greatest concern to us in this example. Mr. Mitchell has elected to have 7% of his Gross pay deducted from his Paycheck and applied to his 401K Retirement Account. He does not want to place any limits on this contribution; therefore, Limit and Balance have been set to zero. The "7.00" entered in the Amount field overrides the value of 0.00 that was entered in the Company Level Code insofar as Mr. Mitchell is concerned. Because we created the Employee Level Code 601 for Mr. Mitchell, the CCS Program will automatically assign this Code to Mr. Mitchell's default Earning & Deduction List, causing the 401k Contribution to be calculated during the Automatic Paycheck Creation Logic. At this point we have defined the Percentage Based Employee side of the Contribution at the Company Level and at the Employee Level (for one Employee). NOTE: Once you create a Company Level Code, you can use the Copy and Assign buttons to automate the definition of Employee Level Codes instead of creating each Employee Level Code manually.
Company Level Code defining Employee 401K Contribution (Fixed Rate)
Since the XYZ Company allows both a percentage and fixed amount to be deducted for 401K, we need to define a Fixed Rate Code as well. The image above shows this definition. All fields are the same as code 601 with one important exception: the Type is "01" -- Fixed Rate. After creating this code, we would create Employee Level Codes (using the Copy button) for those Employees wanting a fixed amount to be deducted in the same manner as we did for Code 601, above.
Now that we have defined the Employee side of the contribution we need to define the Employer Matching Code.
Company Level Code defining the Employer Matching 401k Contribution.
The above image shows the definition of the Company Level Code defining the Employer Matching 401K contribution. The Category has been changed to "K" -- 401K Employer. We have set the Type to "02", the Amount to 5.00 (5% of the gross pay) and the Limit to 50.00, with a very high balance (so it does not expire). This one Code is the only Code that is needed to handle the Employer Matching Contribution; no Employee Level Codes will be required. Let's see how this works: The Type Field: The Type has been set to "02" -- Percent of Gross. This causes the initial calculation of the employer match to be set at 5.00 percent of the gross pay. The Limit Field: A Limit of 50.00 has been entered. This is not $50.00 (fifty dollars), but 50% (fifty percent) of the employees 401K contribution, because we have entered an advanced limit. Note the "A" button on the right of the limit field. (Shown with the arrow above.) When you click this button the dialog shown below is presented.
Advanced Limits have been set for the 401K Employer Match.
We have entered codes 601 and 602 on the top line of the Advanced Limits dialog. This tells the program that the amount we entered in the limit field (50.00) is a percentage of the sum of all codes in this list. In our case, the sum of codes 601 and 602 (an employee will generally only have one of these, not both), will be used to determine the limit of the employer match.
Bringing the math all together. Lets say our employee has earned $1000.00 for the week, and they have a 401K setup to defer 2.50% of their gross pay to their retirement account. Based on these amounts, the employee's 401K deduction will be $25.00 (on this paycheck.) The employer deduction will then be calculated. First, the employer code (code 600) will be calculated at 5.00% of the gross pay, yielding $50.00. Then the advanced limit will be calculated, and the program will sum codes 601 and 602 on this paycheck, (in this case only 601) and determine the value to be $25.00. Next, this amount (the sum of codes 601 and 602) will be multiplied by 50.00 percent (the amount we entered as a limit in the main dialog) to determine the advanced limit and will find it be $12.50. Since the initially calculated total for code 600 is $50.00 and this amount exceeds the advanced limit, the total for code 600 will be reduced to the advanced limit. The resulting employer match will be $12.50. What would happen if the employee deferred more than 5.00% (more than the employer match). Lets follow the math again. Using the same $1000.00 for the week, and deferring of 15.00% of their gross pay to their retirement account, the employee's 401K deduction will be $150.00. The employer deduction will then be calculated at 5.00% of the employee's gross pay, yielding $50.00. Then the advanced limit will be calculated, and the program will sum codes 601 and 602 on this paycheck, (in this case only 601) and determine the sum of these codes to be $150.00. Next, this sum will be multiplied by 50.00 percent (the entered limit) to determine the advanced limit which of course is $75.00. Since the initially calculated total for code 600 is $50.00 and this does not exceed the advanced limit (of $75.00), the total as calculated will remain. The resulting employer match will be $50.00. When you enter a Limit in a non-tax code the program requires a balance. Enter a very large balance so that it will never reach zero. If this declining balance reaches zero, the code will become disabled.
If you have highly compensated employees, or employees who are contributing large amounts to their retirement account, you will want to enter a yearly limit in the employee's 401K code (advanced limits) to prevent the yearly pretax contribution limit from being exceeded. Simply click the Advanced Limit button (The "A" button), on the employee 401K code (601 or 602 in this case.) and enter the applicable yearly payroll limit.
Advanced Limit of $14,000 has been set for the yearly limit for this employee level code. (As defined by the IRS for a 401(K) for the tax year 2005.)
Important: If you create employee level override codes, you must enter the yearly limit in each of these employee level codes (not the company level code.) The allowable pretax contribution limit to a retirement account changes from year to year, please see www.IRS.gov for further information on 401(K) limits and taxation rules.
Another way to (but less common) setup for an employer match is shown below: In this example, the employer match is simply 50.00% (it could be any value of course) of the employee's 401K deduction, but no more than $100.00 per week. This example uses the percent of deductions (type 08) and does not use the advance limits, but instead the include field.
The above image shows the definition of the Company Level Code defining the Employer Matching 401K contribution. The Category has been changed to "K" -- 401K Employer. We have set the Type to "08", the Amount to 50% and the Limit to 100.00, with a Balance of 2000.00. This one Code is the only Code that is needed to handle the Employer Matching Contribution; no Employee Level Codes will be required. Let's see how this works: The Type Field: The Type has been set to "08" -- Percent of Deductions. This setting is similar to "02" -- Percent of Gross; however, instead of the calculations being based the Employee's Gross Earnings, the calculations will be based on one or more Deductions. The Include Field: We have set the Include field to "601,602". Therefore, only Codes 601 and 602 will be considered in this calculation. Here are the steps involved:
NOTE: The Employer's Matching contribution becomes a Liability to the Employer in a similar fashion as Employer FICA, FUTA, etc. The Limit of 100.00 prevents the Employer Match from exceeding $100.00 in any one paycheck..
******************************************************************************************************************** Both employer match setups shown above are commonly used as they both have different characteristics. One of these two methods shown will most likely meet your needs. If you feel you have a situation that neither of these setups address, please contact us at Support@CCSAccounting.com and we will be happy to help you setup your 401K plan. ******************************************************************************************************************** Other Plans: 403B: To set up a 403B, use Category 4 (Employee) or K (Employer). Be sure to use "403" in the Description. (The program looks for "403" in the Description during the printing of W2s to differentiate between a 401K and a 403B.) Uncheck the taxes for which the 403B is a pretax.. A 403 prints as an "E" in box 12 of the W-2. 408P or Simple: For a Simple Plan: Insure either the text "408P" or "Simple" appears in the description. Use Category 4 (Employee) or K (Employer).-- A "S" will be put in box 12 of the W-2. A "408" in the description without the "P" or "Simple" in the description will report on the W-2, box 12 as a "F". Uncheck the taxes for which the Plan is a pretax. Section 125: To set up a Section 125 (Cafeteria Plan), use Category D if paid by the employee or Category X if paid by the employer. Be sure to use either "125" or "Cafe" (or "Cafeteria")--not case sensitive--in the Description. Uncheck the taxes for which the Section 125 is a pretax. Please see Getting ready for the W2 for further infomation on cafeteria plans. ******************************************************************************************************************** Once these Codes are set up, the calculations are performed week after week, automatically with no additional data entry or operator intervention. Note: There are countless other possible methods to set up a 401K. Here are a couple of examples:
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