401(k) Plans

 

401(k)

 

The 401(k) Plan is a profit sharing plan that also allows employees to make contributions with pretax dollars from their pay checks.

The maximum amount that an employee can contribute to a 401(k) Plan in 2013 is $17,500. If a person is age 50 or older, a plan may permit a catch up contribution of $5,500 for 2013.

The amount that highly compensated employees can contribute is limited by the amounts contributed by the non-highly compensated employees. The law requires the use of nondiscrimination tests to determine the maximum contribution levels for highly compensated employees. If a plan is designed to use a Safe Harbor approach, the discrimination tests are automatically satisfied.

Advantages

  • Under certain situations no employer contributions are required.
  • The employer can make discretionary matching and/or profit sharing contributions.
  • Employee participation is optional.
  • Employees' contributions reduce their taxable income.

Possible Disadvantages

  • Plans must satisfy nondiscrimination tests and if these tests are not passed, corrective action must be taken.
  • Administration and testing can be more complicated than for other kinds of plans.


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