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 401k Plans
What is a 401(k) Plan? A 401(k) plan gives a company the opportunity to provide a valuable benefit to its employees at little out-of-pocket cost. Many features of 401(k) plans can be adapted to suit a company's financial condition, desired tax deductions, employee relations and other circumstances. Under a 401(k) plan, a participant may contribute on a before-tax basis to the plan. The term "401(k) plan" comes from Section 401(k) of the Internal Revenue Code, which permits a company to sponsor this type of plan for its employees. Contributions to a 401(k) plan accumulate on a tax-deferred basis. This means that a participant neither pays current taxes on amounts contributed to the plan nor on investment earnings. Taxes are not paid until a participant receives a distribution from the plan, which could be 10, 20 or more years from now. A participant has flexibility in the amount that he contributes to the plan. To increase participation, many companies encourage employees to save by matching part of their contributions. As we shall see later, it may be necessary for the non-highly compensated employees to participate in the plan in order to pass the annual non-discrimination tests. It is only by passing these tests that highly compensated employees can contribute meaningful amounts to the plan. |
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