401k Plans
A 401(k) is an employer-sponsored savings program for employees. Eligible employees may elect to make regular pre-tax contributions to the program. This program is made possible by Section 401(k) of the Internal Revenue Code.
- Defined contribution plan - Each payday, through automatic payroll deduction, 401(k) participants contribute a defined amount of their pay to their individual accounts.
- Tax-deferred contributions - The 401(k) contribution is deducted from an employee's gross pay before income taxes are calculated and withheld. Taxes are deferred until the money is withdrawn from the plan.
- Investment choice - Participants specify how their savings will be invested, selecting from an array of investment options chosen by the plan administrator with varying degrees of risk and potential return.
- Employer matching contributions - The sponsoring company may elect to contribute to its employees' accounts by matching a portion of employee contributions. Any contributions that the company makes to the 401(k) are tax-deductible.
A 401(k) plan is a highly visible benefit that continues to gain popularity among employees. At the same time, its tax advantages make it a low-cost enhancement to any employee benefits package.
A 401(k) adds to the company's success in many ways:
- Company expenses and contributions to the 401(k) plan are tax-deductible, up to defined IRC limits.
- A 401(k) helps to attract and retain top-notch employees in every age group.
- By implementing a 401(k) savings plan, the company reduces the need for other types of retirement programs.
401(k) plans are appealing for employees due to the tax advantages and financial security they offer:
- Tax savings
- Tax-deferred earnings
- Convenience of automatic payroll deductions
- Loans and hardship withdrawals
- Flexibility and control over investments
- Portability
- Employer matching contributions
There are contribution limitations as set by federal regulations as well as non-discrimination requirements and annual federal filings.
