A 401(k) or 401k is a company retirement savings account that offers tax and savings benefits.
401k plans offer many benefits, but there are restrictions also.
- Any business, whether a C Corporation, S Corporation, partnership, sole proprietorship, self-employed can establish Plan.
- The company sets the eligibility requirements, within certain guidelines, at the time the plan is established.
- Employer can restrict individuals with less than one year service, union members, non US citizens, part-time workers, etc., from being eligible for the plan.
- Contributions to plan can come from voluntary employee salary reduction, from employer, or both.
- Each individual employee can defer in 2015 up to $18,000 or 100% of compensation, whichever is less.
- Participants age 50 and over can make additional “catch-up” contributions of $6,000 in 2015.
- Employees are immediately 100% vested with their own salary reduction tax deferred contributions.
- Employee withdrawals before age 59 1/2 may be subject to 10% penalty.
- Employees who retire any time during the calendar year in which they turn 55, or later, are not subject to the 10% penalty.
- Employers can establish a vesting schedule, within certain guidelines, for the contribution the company makes to the 401k.
- Employers are not required nor obligated to make any contribution to the 401k, although employer may have some obligation to contribute if plan is deemed top heavy.
- Turnkey and Internet based plans are available.
- Excellent range of investment options available for the plan sponsor to offer within the plan.
- The investment choices in most plans range from 8 to 25 options. The average plan has about 19.
- 401k plans may permit “self-directed investment accounts” and company stock purchase within the plan.
- Employee contributions to the plan are not subject to federal income taxes until a distribution from the plan is made. Any investment gains and earnings also enjoy tax deferral until distribution.
- This type of plan can permit loans and hardship withdrawals, but is not required to do so.
- Participants can start, stop contribution during course of year, as determined by the company.
- The employer can receive certain tax benefits for contributions.
- Plans are subject to top heavy and discrimination testing.
- Typically the amount the owners and highly compensated individuals can contribute to a 401k is a function of the contributions of the other employers.
- 401k plans can be subject to IRS Form 5500 filings.
- Generally, the vendor selected by the plan sponsor does all accounting, participant reporting, testing, and files 5500 reports with the IRS.