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Elective Deferral
The U.S government established the 401(k) program in 1981 with it, it included several special tax advantages - all designed to encourage people to save and prepare for retirement.
Under current law, 401(k) plan participants are allowed an annual deferral limit of $16,500 ($22,000 if you will be age 50 or more). After 2009, these contribution limits may be increased in $500 increments to factor in the effects of inflation.
As with most tax qualified pension plans, the advantages lie in the tax deferred status these assets retain under current law. Secondly, the employer can elect to make contributions by matching all or portion of the contributions.
Please note that there are strict rules that employers must follow, including comprehensive record keeping and yearly non-discrimination tests.
Secondly, assets held under a 401(k) are generally not available until age 59-1/2 unless you are willing to pay substantial IRS imposed penalties. There are certain circumstances that you can take early loans/withdrawals for such things as financial hardship, disability, first home purchase, post secondary educational funding, etc.
Legal Document
401(k) plans are established by the employer by adopting a written plan document. This document defines the legal responsibilities for all parties and provides all details of the terms therein.
The legal documents can be prototype documents or custom designed documents. The IRS should approve custom documents in advance.
Who is Eligible
Generally, the company sponsoring the plan outlines or chooses the eligibility requirements, but they too must adhere to certain federal standards. Such eligibility requirements might include age, years of service, vesting, etc.
401(k) Administration
Often referred to as "TPA's" (third-party administrators), these groups provide the highly technical record keeping needed to keep these plans in compliance with the law. Their job is to monitor the plan and report all necessary activity to the IRS.
Although some companies simply choose to administer these plans internally, the greater the number of participants often times the better it is to use a TPA. Therefore, what you will typically see in the marketplace is a turnkey of "bundled" approach whereby the 401(k) provider manages all aspects of the plan, including investment options, payroll deduction, accounting, annual testing (ADP & ACP).
401(k)'s are Good
In terms of administration and testing, 401(k) plans can be complicated.
However, they are a very valuable tool as it allows participants to defer
compensation and accumulate future earnings without taxation. Of course, like all
qualified plans, which are deductible, taxes are due upon withdrawal and taxed as ordinary
income.
Action To Take If you are looking to establish a 401(k)
plan and would like a FREE Proposal & Analysis, |
Action To Take If you have an existing 401(k) plan and
are not entirely pleased with it, |
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