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401K

401(k) Retirement Plan

The 401(k) plan is a defined contribution retirement plan suitable for any size business with employees. For programs with employer matching, there must be at least one non-highly compensated employee. A 401(k) plan can be very cost-effective because it can allow employee contributions, which may reduce the amount of funds the employer contributes.

Contributions are made in three different ways to a 401(k) retirement plan.

1) Employer profit sharing contributions.
2) Employee salary deferrals.
3) Employer matching contributions.

The employer profit sharing and matching contributions are both optional and at the discretion of the employer. Employee salary deferrals are optional and at the discretion of the employee. Taxes on employee salary deferrals are deferred until the money is withdrawn from the plan. Amounts generally cannot be withdrawn before age 59 1/2 or termination of employment.

Generally the maximum amount of funds the employer may contribute on an annual basis is 15% of the total compensation of the plan's participants. The maximum allocation to any one participant from employer contributions and salary deferrals combined is the lesser of $30,000 or 25% of their compensation. The maximum pre-tax salary deferral an individual may make for 1994 was $9,240 and is adjusted each year for inflation.

If an employee were to defer the maximum amount of $9,240, the maximum the employer could contribute on behalf of the employee would be $20,760 resulting in the total maximum allocation of $30,000. The employee would need annual compensation of $120,000 or more in order to qualify for a $30,000 annual allocation. It may be necessary under certain circumstances to reduce a highly compensated employees' deferral to meet various non-discrimination requirements. In applying all of the above qualifier retirement plan rules and in the sections below, only $150,000 of compensation may generally be taken into account.