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.
- 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.
- 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.