Traditional 401(k) Plan

There are many types of retirement programs set forth in the Internal Revenue Code. One of the most popular types of retirement plans is the 401(k) Plan.

What is a 401(k) Plan?

A 401(k) Plan is a qualified defined contribution plan that allows employees to defer compensation for retirement along with giving the employer the opportunity contributes as well. Employees can elect to defer their compensation on either a pre-tax or after-tax basis (known as Roth 401(k)). The manner in which the compensation is deferred determines whether the earnings of the plan are on a tax deferred or tax free basis.

How much can I contribute to a 401(k) Plan?

The amount that you can contribute to a 401(k) plan may change from year to year depending on the guidelines set forth by the Internal Revenue Service. For 2012, the maximum contribution that an employee can defer into a 401(k) plan is $17,500 (indexed). This limit is per taxpayer and any 401(k) contributions withheld for the taxpayer’s behalf must be aggregated to ensure the taxpayer does not exceed applicable limits.

For taxpayers who have attained age 50 or older, a catch-up contribution is allowed each year. The contribution may change from year to year depending on the same guidelines as the 401(k) contributions. For the 2012 plan year, the catch-up contribution is $5,500, thus a total of $22,500 is allowed for an individual age 50 or older.

Are employees required to contribute to the plan?

An employee is not required to participate in the plan. However, the employer may elect to adopt automatic enrollment provisions to promote participation in the plan. The automatic enrollment provisions require the employer to enroll all employees into the plan at a specified percentage unless the employee elects to contribute a different amount or opts out of participation.

Can the Employer make contributions to the Plan?

In most 401(k) plans, the employer may elect to make a discretionary contribution to the plan. These contributions can be a matching contribution, a profit sharing contribution or both. The employer contribution is a tax deduction for the employer.

How does an employee receive their money from the plan?

Employees can receive a distribution from the plan in a number of ways. Funds can be received via plan loans, hardship distributions, in-service distributions, required minimum distributions or distributions due to termination or retirement. Of course, the preferred distribution would be due to retirement. The provisions of the plan set forth by the employer will explain the options for receiving a distribution from the plan.

What is the typical cost to administer a 401(k) Plan?

A 401(k) plan is required to have a written plan document. This document is drafted by your third party administrator and executed by the employer. In addition to the plan document, the plan is required to be tested on an annual basis to ensure the plan passes all the nondiscrimination rules set forth in the Internal Revenue Code. In addition, a Form 5500 must be filed electronically with the Department of Labor on an annual basis. If the employer has more than 100 employees eligible to participate in the plan, an annual audit of the plan is also required by an independent auditor.

What are the first steps to getting a 401(k) plan started?

If you are interested in exploring a 401(k) plan for your company, please contact Resource Benefits Administrators and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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