401k Plan Information
A 401k plan allows eligible employees to have a portion of their pre-tax earnings placed into a qualified retirement plan. Some plans will allow after-tax contributions as well. The assets of a 401k plan are typically devoted to a variety of investment vehicles like bonds, stocks, cash equivalents, guaranteed investment contracts (GICs) or a diversified portfolio that consists of the above-mentioned as well as other investments. Contributions and subsequent earnings on a 401k account are only taxed when withdrawn.
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History
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The 401k plan was created through The Revenue Act of 1978. The act contained a provision that became the Internal Revenue Code (IRC) Section 401k for which the plan is named. The 1978 legislation added permanent provisions to this Internal Revenue Code, authorizing salary reductions in the form of deferred compensation as a source of plan contributions. The law officially went into effect in January 1980.
Traditional Plans
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A number of 401k) plans are available for employers and employees. Each type of plan has different rules by which employers must abide to receive tax benefits. In a traditional 401k plan, eligible employees can make pre-tax contributions through payroll deductions. Employers have the option to make contributions on behalf of all participating employees, or they can make matching contributions based on the employees' deferral amounts or both.
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Safe Harbor Plans
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Similar to a traditional plan, a safe harbor 401k plan offers employees the option to defer a portion of their pre-tax earnings. The difference is that the safe harbor plan must provide for employer contributions that are not contingent upon an employee's participation. An employer can make matching contributions, limited to participating employees, or it can make contributions on behalf of all eligible employees whether they make elected deferrals or not. With this type of plan, employers must provide each employee with sufficient notice before the start of a new plan year; at least 30 days but not more than 90 days ahead of time.
Simple Plans
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This type of plan was designed for small businesses with 100 or fewer employees. The simple 401k plan allows the small business owner an effective and cost-efficient means to offer her employees retirement benefits. To be eligible, employees must have received at least $5,000 in earnings for the preceding calendar year. Employees who are eligible to participate in this plan may not receive additional contributions or benefit accruals under another plan of the employer.
Plan Qualifications
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A qualified 401k plan meets the requirements of Internal Revenue Code section 401k. The section sets the standards for qualified retirement plans such as employee eligibility, participants' rights to plan benefits, contribution amounts for both participants and employers and how distributions can be made. There are significant tax benefits for participants and employers. Employers can receive a tax deduction for plan contributions, and participating employees are able to protect plan income and earnings from taxes until distributed.
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References
Resources
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