Snap401k

401k Plans

A section 401k plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. These deferred wages (commonly referred to as elective deferrals) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.With a 401k plan, employees can choose to defer some of their salary.  So instead of receiving that amount in their paycheck, the employee defers, or delays, getting that money.  In this case, their deferred money is going into a 401k plan sponsored by their employer (that would be you).  This deferred money generally does not get taxed by the federal government or by most state governments until it is distributed.

There are different types of 401k plans, including Traditional 401k plans, Self Employed 401k plans (or Solo 401k), and Safe Harbor 401k plans.

If you establish a 401k plan, you:

1. Can have other retirement plans.
2. Can be a business of any size.
3. Need to annually file a Form 5500 or Form 5500 EZ.

You can make a 401k plan as simple or as complex as you want to.  A pre-approved 401k plan might be just the thing here if you want to cut down on administrative headaches and expenses.

Pros and Cons:

• Greater flexibility in contributions.
• Employees may contribute more to this plan than under IRA plans.
• Good plan if cash flow is an issue.
• Optional participant loans and hardship withdrawals add flexibility for employees.
• Administrative costs may be higher than under more basic arrangements.
• Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.
• Additional withdrawal and loan flexibility adds administrative burden for the employer.

Who Contributes:  Employee salary deferrals and/or Employer contributions.  Employees are always 100% vested in their salary deferrals.  Employer contributions may be vested on a graduated vesting schedule.

401k Contribution Limits:
Employee - $16,500 in 2010.  If the employee is aged 50 and over, an additional “catch-up” contribution is allowed.  The additional contribution amount is $5,500 in 2010.

Employer/Employee – The lesser of 25% of compensation or $49,000 in 2010.

In-Service Withdrawals:  Yes, but subject to possible 10% additional tax if under age 59-1/2.

Information provided by Internal Revenue Service - Department of the Treasury