What is a 401(k) Plan?
A 401(k) Plan is a Profit Sharing or Stock Bonus Plan that allows an eligible
employee to defer a portion of their salary to the Plan (i.e.; a Cash or Deferred Election
or "CODA"). Amounts deferred into the Plan plus account earnings are not
taxed until they are distributed from the Plan. However, accounts generally may not
be distributed without penalty until the employee retires, becomes disabled, dies, or
reaches age 59 1/2.
A 401(k) Plan can be a "stand alone" (permitting elective contributions
only) or it may also permit employer contributions. These contributions may be in
the form of a Matching Contribution or a Discretionary Contribution. Discretionary
contributions may be allocated according to any of the acceptable methods available in a
401(k) Plans are subject to additional annual "non-discrimination" tests
called Actual Deferral Percentage (ADP) Tests and/or Actual Contribution Percentage (ACP)
Tests. These tests ensure that the average deferrals and/or matching contributions
for the Highly Compensated Employee Group do not exceed the average deferrals and/or
matching contributions of the Non Highly Compensated Employee Group by more than a
specified amount. These tests are required to be performed each year. Should a
Plan fail these tests for a year there are two options available to an employer; refund
monies to Highly Compensated Employees...or...make additional contributions to Non Highly
Compensated Employees. In order to avoid a penalty tax, the correction must be made
within 2 1/2 months after the end of the Plan Year.
Effective 1/1/02, the maximum annual employees' salary deferral to a 401(k) Plan is the lesser of
100% of gross
pay or the applicable dollar limit in effect for said year The Dollar limits are
as follows:
'02........ $11,000 ; '03.........$12,000 ; '04........ $13,000 ; '02........ $14,000; '05........ $15,000
There are catch up contributions available for individuals who attain age 50 during any plan year of the following:
'02........ $1,000 ; '03.........$2,000 ; '04........ $3,000 ; '02........ $4,000; '05........ $5,000
The dollar limit is an individual annual limit. Thus, should an employee participate in more than one employers' 401(k) Plan in a given year....the combined deferral may not exceed the applicable annual dollar limit
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