Named for the Tax Code section that governs them, 401(k) plans are the most popular employer-sponsored retirement plans in the U.S. For the most part, they have replaced the pension plans employers once provided for employees.
About 401(k) Retirement Plans
As a feature of a qualified profit-sharing plan, a 401(k) allows your employees to contribute portions of their salary to individual accounts. Except for designated Roth deferrals, which are handled differently, these deferrals are excluded from the employees’ taxable income. When the employee retires, distributions, including earnings, from a 401(k) account are taxable income for the employee.
Employers can contribute additional funds to employee 401(k) accounts. To the extent that they do not exceed certain limitations, as described in the Internal Revenue Code, these contributions are deductible on the employer’s federal tax return.
Types of 401(k) Plans
Employers can choose from several types of 401(k) plans, each with its own specific rules.
This plan allows for payroll deductions of pre-tax deferrals from eligible employees. Employers have the option to make contributions matching employee deferrals, to contribute on behalf of all participants, or both.
In a safe harbor 401(k) plan, employer contributions are fully vested at the time they are made. Employer contributions may be matching contributions to employee deferrals or made on behalf of all eligible employees, even those who did not defer funds.
This type of 401(k) provides a cost-efficient means for small businesses to offer a retirement plan to their employees. It is not subject to annual nondiscrimination tests. Employers are required to make fully vested contributions.
Choosing a 401(k) plan can be a complicated process. Our agent at Schmutter Strull Fleisch Inc. in New York, New York, can help you select a plan that is right for your company.