What is a 401(k) Plan?

As part of the Revenue Act of 1978, Congress enacted IRS Section 401(k) which authorized employees to defer part of their salary, to a Qualified Plan, for tax purposes.

As an employer, you have the option to make the 401(k) option a part of your Profit Sharing Plan or as a stand-alone employee deferral only Plan.

An "employee deferral only plan" would feature no required contributions by the corporation or partnership. However, the sponsoring entity would have the option to match a certain percentage of the employee's deferral. Such a contribution would increase the employee's incentive to defer for their retirement security.

Why Would An Employee Want To Contribute?

Elective employee deferrals to a 401(k) Plan provide the Participant with a number of tax advantages not available through alternative types of tax deferral vehicles. The primary advantage of a 401(k) Plan is the employee's ability to defer taxation on money that otherwise would be subject to taxation. In addition, any interest earned on the contribution is tax deferred. The contribution limits that are available to the 401(k) participant are far more generous than any alternative deductible or pre-tax arrangement available. In addition to the employee's elective deferral, an employer may voluntarily make matching contributions that also accumulate tax deferred.

How Does A 401(K) Plan Operate?

Eligible employees may contribute to the Plan through regular payroll deductions;

Participants are currently able to defer federal, state and local taxes on amounts contributed to the Plan;

No taxes are currently paid on any investment earnings in the participant's accounts until withdrawn;

Favorable tax treatment may be available upon distribution of funds;

Participants will receive quarterly statements detailing the activity in their accounts.

To find out if this type of plan is suitable for your company, please contact one of our consultants at LNS.