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401(k) Plans

401(k) plans are one of the fastest growing plan designs available today. Technically known as Cash Or Deferred Arrangements (CODAs), the 401(k) design is popular among employers and employees. Primarily because the employer is not required to fund the plan and the employees can continue to deposit on a pre-tax basis up to 100% of their salary, this is a major change due to the new EGTRRA Tax Act of 2001, regardless of what the employer contributes. It's the only design that offers an employer/employee partnership while saving for retirement in a pre-tax environment.

401(k) is a type of profit sharing plan under which participants can voluntarily contribute a portion of their salary on a pretax basis.
Salary deferrals are not included in employees' income for federal or state (except PA and AL) tax purposes. However, they are included for Social Security (FICA) and unemployment tax (FUTA) purposes.
The employer may choose to make additional contributions, although there is no requirement to do so. The most common types are employer matching contributions and traditional profit sharing contributions.
The maximum tax-deductible employer contribution that can be made is 25% of the compensation of all the employees eligible to participate in the plan.
Combined employer and employee amounts for any one participant cannot be more than 25% of reduced pay up to $40,000 in 2003.
Employee salary deferrals are limited to $12,000 in 2003 and will increase in $1,000 increments to $15,000 by 2006. The maximum deferral amount is adjusted annually.
401(k) plans are a good choice for the employer who wants a low-cost employee fringe benefit. The plan is funded partially or totally with employee pretax contributions. Thus, a relatively small capital outlay can provide a highly visible employee benefit program. It can be an excellent way to give employees the opportunity to replace lost IRA deductions.
401(k) plans work exceptionally well for all eligible participants (including highly compensated employees) when a safe harbor election is made or the 401(k) is combined with a profit sharing plan.

For a chart listing the details of a SIMPLE IRA, SIMPLE 401k, Safe Harbor 401k, and a Traditional 401k - Click Here

Filing Requirements: Annual filing of Form 5500 may or may not be required.

Who May Not Have To File
You do not have to file Form 5500-EZ (or Form 5500) for a plan year (other than the final plan year) that begins on or after January 1, 2007, if you meet the five conditions above and you have one or more one-participant plans that separately or together had total assets of $250,000 or less at the end of that plan year.

Example for plan years beginning on or after January 1, 2007. If total assets in a plan (or in two or date more plans, separately or together), that otherwise
satisfies the requirements for filing the Form 5500-EZ, exceeded $250,000 at the end of the 2007 plan year, a Form 5500-EZ must be filed for the 2007 plan year.

Final plan year. All one-participant plans should file the Form 5500-EZ for their final plan year indicating that all assets have been distributed. The final plan year is the year in which distribution of all plan assets is completed. Check the “final return” box at the top of Form 5500-EZ if all assets under the plan(s) (including insurance/annuity contracts) have been distributed to the participants and beneficiaries or distributed to another plan.

Source: www.IRS.gov

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Wednesday, January 02, 2008 11:23 AM