What is a 401(k)? A 401(k) plan is a qualified retirement savings plan in which an employee can automatically contribute (or defer) a portion of their wages to the plan on a pre-tax basis. The contributions are not subject to federal income tax withholding at the time of deferral and are not reflected as taxable income until withdrawn, so the value accrues on a tax-deferred basis. Individual accounts in a 401(k) plan are generally not restricted as to the permitted investments.
What are the benefits of participating in 401(k) Plan? Elective deferrals to a 401(k) plan are always immediately vested. Also, those deferrals and associated investment gains are not subject to federal income taxes until withdrawn. Optional employer contributions can be made to the plan if the employer’s plan document permits them.
What are ADP and ACP Tests? Actual Deferral Percentage and Actual Contribution Percentage Tests are required annual tests the employer must perform to ensure the plan meets specific nondiscrimination requirements. These tests are a way to prove that the employer is matching fairly among highly compensated employees and non-highly compensated employees.
What is a Safe Harbor 401(k) Plan? Similar to a traditional 401(k), a Safe Harbor 401(k) must provide for employer contributions that are fully (100%) vested when made. The annual nondiscrimination tests do not apply to the Safe Harbor 401(k) plan. Instead, the employer must provide eligible employees with written notice of their rights and obligations under the plan.
What is a SIMPLE 401(k)? Created for small businesses, the SIMPLE 401(k) is available to companies with fewer than 100 employees who received at least $5,000 in compensation in the preceding calendar year. Nondiscrimination testing does not apply to SIMPLE 401(k) plans, but like the Safe Harbor plan, the employer must provide eligible employees with written notice of their rights and obligations under the plan.
What are the eligibility requirements of a 401(k)? Eligible employers of a 401(k) plan are 501(c)(3) tax-exempt and non- 501(c)(3) tax-exempt organizations, Indian tribes, International organizations, most for-profit entities, and rural cooperatives. Eligible employees of a 401(k) plan are those specified by the employer within the plan document, but cannot include independent contractors.
What types of distributable events are allowed under a 401(k)? Employers, but not employees, may transfer funds from one provider to another. Loan availability is also dependent on the plan rules set forth by the employer. Employees may take a rollover; however, distributions are restricted to the following limitations: