401(k) Plan Overview

The 401(k) offers employers a simple plan design with the options necessary to meet their objectives and maximize employee participation. 401(k) plans include provisions for employee deferrals, employer matching contributions, profit sharing contributions and receipt of employee rollovers from other employer plans (if desired). All employer contributions can be made on a discretionary basis. Distributions are made to participants at retirement, death, disability, or termination of employment. These plans offer many advantages to both employers and employees as described further below.

401(k) plans provide the following advantages for employers:

• Aid in attracting and retaining employees.
• Employee deferrals are deductible to the employer.
• Contributions and administrative expenses paid by the plan sponsor are also tax deductible.
• Flexible matching contribution levels and discretionary profit sharing contributions.
• Graduated vesting schedule for employer contributions.
  

401(k) plans also provide advantages for employees:

• Ability to save pre-tax dollars through the convenience of payroll deduction.
• Choice of investment options.
• Employee deferrals that are always 100% vested.
• Contributions and earnings that are tax-deferred until the money is withdrawn – generally at retirement when an employee may be in a lower tax bracket.
• Employer matching or profit sharing contributions, depending upon plan design.
• Toll-free telephone and Internet access to account balances and the ability to reallocate investments through your Investment Institution.
• Access to a call center through your Investment Institution.

Additional information pertinent to 401(k) Plans:

• Employees may generally contribute up to $15,500 in 2007 and $15,500 in 2008.
• Employer contributions may vary from 0% to 25% of the total annual eligible payroll and are usually determined after the close of each plan year
• Total allocations (contributions plus forfeitures) to a single participant cannot exceed 100% of his individual compensation or the annual addition limit in effect for that year ($46,000 for 2008).
• The annual compensation limit is $225,000 for plan years beginning in 2007, $230,000 for plan years beginning in 2008.
• Distributions may be made in case of a hardship but may be subject to a 10% withdrawal tax (in addition to income taxes) prior to age 59 ½.
• “Catch-up” contributions may be made by participants 50 years or older in the amount of $5,000 in 2007 and $5,000 in 2008.

Matching Contribution Worksheet

This worksheet may be used to estimate the employer matching contribution based on different employee deferral and employer matching rates. In using this worksheet, assumptions will have to be made about the contribution level of employee deferrals.

1. Total Payroll - This should equal gross salaries for all employees.
2. “Eligible” Payroll - Total salaries for all employees who are age 21 or older and have completed at least one year of service.
3. Employer Matching Contribution Formula - The following chart illustrates examples of different matching contribution levels from which you may choose. It shows matching amounts capped at three different levels to create nine factors. Use these factors to determine your potential match:
   
   
   

   	Match Up To (% Deferred by Employee):
   Match Amount	2%	4%	6%
   25%	.005	.010	.015
   50%	.010	.020	.030
   100%	.020	.040	.060

   
   
4. Example:
   

   Total Payroll = $400,000
   Eligible Payroll = $350,000
   Employee Deferrals = 4% of eligible compensation
   Employer Match = $ .50 for each $1.00 deferred up to 4% eligible compensation (Factor = .020)
   Employee Deferral Contribution = $14,000 (.04 x $350,000)
   Employer Match Contribution = $7,000 (.02 x $350,000)

5. 
   

   a) Total Payroll = $__________
   b) Eligible Payroll = $__________
   c) Employee Deferrals = __________% of eligible compensation
   d) Employer Match = __________ Factor = ($__________ up to ________% eligible compensation Employee
   
   Deferral Contribution = $________ (b x c)
   Employer Match Contribution = $ ________(b x d)

Non-Discrimination and Top-Heavy Testing / The "Safe-Harbor" Alternative

Non-Discrimination Testing - In order to obtain the distinctive tax-favored advantages of a 401(k) plan, it must not discriminate in favor of higher-paid employees. A special test called the Actual Deferral Percentage test (ADP) is required. This test compares the average deferral percentages of the highly compensated employees (HCE) and the average deferral percentages of the non-highly compensated employees (NHCE).

A Highly Compensated Employee is anyone in the current or look-back year who is a 5% owner or received compensation of more than $100,000 in 2006 or $100,000 in 2007.

The following chart illustrates the maximum deferral percentage available to highly compensated employees, based on the average deferral percentage for the non-highly compensated employees.

Employer matching contributions and employee voluntary non-deductible contributions must also meet similar non-discrimination tests. An additional test will be required for these contributions.

Top-Heavy Testing - A 401(k) plan is top-heavy if the present value of the account balances for “Key Employees” exceed 60% of the total present values of account balances of all participants. If the plan is determined to be top-heavy, a required employer contribution must be made to all non-key eligible employees equal to the lesser of 3% of the non-key employees compensation or the highest individual deferral percentage of the key employees. For further information about Key Employees, please contact your NRS Representative.

The “Safe-Harbor” Alternative - As described above, 401(k) plans are required to meet certain non-discrimination requirements. Non-discrimination testing must be run each year to ensure that the plan complies with these requirements. If the tests do not pass, corrections must be made (often deferrals and/or matching contributions need to be returned to some or all of the HCEs).

A 401(k) “Safe-Harbor” plan allows an employer to avoid running these tests provided the employer is willing to satisfy the requirements of a Safe-Harbor plan. For instance, to satisfy the ADP test, the employer could provide either of the following:

• A 3% of compensation non-elective contribution to all eligible NHCEs; or
• A match of 100% of deferrals up to 3% of compensation and 50% match on deferrals from 3% to 5% of compensation for deferring NHCEs.

These contributions must be 100% vested. The first Safe-Harbor alternative described above may also be used to satisfy a top-heavy requirement (if necessary).