401(k) Plans
A retirement plan that accepts employee contributions, and oftentimes matches them, 401(k) plans come in many shapes and sizes. Traditional, tax-deferred 401(k) contributions are made before income taxes are applied, and earnings and contributions are not taxable until they are withdrawn. Roth 401(k) contributions are made with after-tax dollars, but withdrawals, including earnings, are tax-free if certain conditions are met.
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Advantages
- Participant deferral of current income taxes is available or pre-payment of income taxes when using the Roth option
- Automatic Contribution Arrangement feature is available
- Elective Automatic Contribution Arrangements have six months after plan year-end to complete testing
- Elective Automatic Contribution Arrangements have a 90-day window to return automatic deferral contributions to participants who failed to opt out of the plan
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Eligibility
- All taxable businesses and tax-exempt organizations (excluding government entities) may establish 401(k) Plans
- Any employee with 1,000 hours of service within one year and who is age 21 or older must be covered; exclusions are permitted for certain employees
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Maximum total plan contribution that the employer may deduct
25% of total eligible payroll (maximum eligible pay per participant is $275,000) plus the amount of elective deferrals contributed
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Maximum annual allocation to participant’s account
100% of participant’s total pay or $55,0001, whichever is less
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Maximum annual participant deferral (cannot exceed 100% of pay)
Up to $18,5002; catch-up contribution of $6,000 if age 50 or older. Annual participant deferral can be before-tax, Roth after-tax or both, depending on plan terms
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Required employer contribution
Discretionary, unless the plan is top heavy3
