How Does a 401k Work? Benefit Questions Answered

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As an employer, it is important to know how to answer benefit questions like, how does a 401k work ? Offering benefits to employees is extremely in today’s job market when it comes to attracting a talented workforce. When looking for employment, individuals absolutely look for good pay, but they more often choose an employer that offers a good benefits package over those that don’t. Although withholding optional benefits may add to your bottom line in the short run, it can be extremely costly to your business in the long run. We want to give you a heads up on the most sought after perks, so you don’t have to think to yourself, how does a 401k work? You can incorporate this knowledge to make sure your business can be prosperous as an employer of choice.

How Does a 401k Work?- Benefit Plan Q&A

According to a Glassdoor 2015 U.S. Employment Confidence Survey, 79% of employees (almost 4 out of 5 people) would prefer new or additional benefits/perks over an increase in pay. Of the preferred benefits, a few stand out — here’s how they work.

401k Plans


  • What is a 401k?


 A 401k plan is the most commonly seen type of defined contribution retirement plan. Contributions are saved for retirement.


  • Where does the money come from?


The employee is the one who contributes to the plan. They decide how much they want to put in, and the employer deposits the money on their behalf in the form of a payroll deduction. Some companies choose to match employee contributions up to a certain percentage of income.

  • What does it offer beyond being a savings account?

This is where things get good. Not only are the funds saved for retirement, but they also grow. The company offering the plan, or plan sponsor, hires a vendor tasked with investing whatever money is deposited. These can be pre-diversified, or the employee may choose how to invest. Pre-tax contributions cause greater growth, allowing the full value to be capitalized upon, while lowering the employee’s taxable income.


  • So there’s no tax on 401k contributions?


Not quite. The money is tax exempt until it is pulled out after a certain number of years. If it is used before then, one must pay a penalty and any applicable taxes. Other plans exist where contributions may be made after tax.



  • Aren’t employers required to offer health insurance under Obamacare?


Not all employers are required to offer health insurance to their employees. This is based upon how many employees a company has, along with a few other criteria. Coverage that meets the standards must be offered to a certain percentage of full time and full time equivalent employees (95%).


  • Who pays for the health insurance premiums?


Insurance premiums are paid by both the employer and the employee. To be in ACA compliance, the employer is required to pay 50% of the premium, but many companies pay up to 85%.


  • How can a business be more competitive with offering insurance?


Having many plan options, paying all premiums, and offering plans to part time employees are all good choices. Outside of health insurance, offering dental and vision coverage gives an edge. These plans work in the same way we’ve outlined.

Paid Time Off


  • When are employers required to give time off?


By law, employees must be given time off to vote, provide military service, and serve on a jury. Employers must also comply with the Federal Family and Medical Leave Act, which is up to 12 weeks of unpaid leave under certain circumstances and for serious health conditions.


  • What kind of time falls under PTO?


Different types of PTO are paid holidays, vacation time, and paid sick leave.


  • How does PTO work?


An employee is allowed to take time off of work while still receiving pay for that time. Policies differ on how many hours an individual has and how quickly these hours accrue. Usually, some unused vacation time may carry over to the next year, while sick time does not.

401k and Benefit Experts

Benefits are good for more than just attracting talent, they have been shown to increase retention, promote higher morale, boost productivity, and help you keep up with a competitive marketplace. If you’re looking to start offering them, it’s important to know what they are and how they work. If you’re still thinking to yourself, how does a 401k work , PayTech is here to benefit your business. We offer packages that help you attract, retain, and keep employees happy. From award winning HR services, to payroll plus, we have the right package. To get more information on what tools you need be an employment leader, contact us at (602) 900-8807.


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