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.
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.
plans work exceptionally
well for all eligible participants (including highly compensated
employees) when a safe harbor election is made or the
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 -
Filing Requirements: Annual filing
of Form 5500 may or may not be required.
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.
For Professional Consultation Services Contact:
Executive Benefit Plans, Inc.
1186 Route 56 East
Apollo, PA 15613-9725 USA
Phone: 800-622-2411 or Fax: 724-478-1688
To Open, Review, and/or Print our Corporate Brochure -
Successor Plan Rule
provided for review and consideration only. Please consult legal and tax
practical advice pertaining to your business and personal situations.
This page was last reviewed and/or updated
Friday, July 03, 2015 05:21 PM