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Elective Deferral
Under current law, 401(k) plan participants are allowed an annual deferral limit of $15,000 and all contributions are made with pre-tax dollars. Employees 50 years old and older may make a $5,000 catch-up contribution.
As with most tax qualified pension plans, the advantages lie in the tax deferred status these assets retain under current law. Secondly, the employer can elect to make contributions by matching all or portion of the contributions.
The potential disadvantages lie in the fact that there are very strict rules that the employer must follow, including extensive record keeping and yearly non-discrimination tests.
Secondly, assets held under a 401(k) are generally not available until age 59-1/2 unless you are willing to pay substantial IRS imposed penalties. There are certain circumstances that you can take early loans/withdrawals for such things as financial hardship, disability, first home purchase, post secondary educational funding, etc.
For these reasons, some employers have elected to use discriminatory Executive Benefit Plans as an alternative. These plans clearly favor the higher ranked employees and also tie these key people to the corporation for longer periods of time. For more information on these options, please click HERE.
Legal Document
401(k) plans are established by the employer by adopting a written plan document. This document defines the legal responsibilities for all parties and provides all details of the terms therein.
The legal documents can be prototype documents or custom designed
documents. The IRS should approve custom documents in advance.
Generally, the company sponsoring the plan outlines or chooses the
eligibility requirements, but they too must adhere to certain federal standards. Such
eligibility requirements might include age, years of service, vesting, etc.
Often referred to as "TPA's" (third-party administrators), these groups provide the highly technical record keeping needed to keep these plans in compliance with the law. Their job is to monitor the plan and report all necessary activity to the IRS.
Although some companies simply choose to administer these plans
internally, the greater the number of participants often times the better it is to use a
TPA. Therefore, what you will typically see in the marketplace is a turnkey of
"bundled" approach whereby the 401(k) provider manages all aspects of the plan,
including investment options, payroll deduction, accounting, annual testing (ADP &
ACP).
In terms of administration and testing, 401(k) plans are complicated.
However, they are a very valuable tool as it allows participants to defer
compensation and accumulate future earnings without taxation. Of course, like all
qualified plans, which are deductible, taxes are due upon withdrawal and taxed as ordinary
income.
Action
To Take If you are looking to establish a 401(k)
plan and would like a FREE Proposal & Analysis,
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Action
To Take If you have an existing 401(k) plan and
are not entirely pleased with it,
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Action
To Take If you are leaving your current employer
and would like to explore
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Copyright © 1998
Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
member FINRA, SIPC.
Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
