A 401(k) plan is a profit-sharing plan designed to allow employees to defer salary for retirement savings. An employer can also make deductible matching contributions, which provide a strong incentive for employee participation. Because contributions are pretax, a 401(k) can reduce your employees' taxes.
- Allows employees to defer pre-tax salary for retirement savings. 401(k) plans help attract and retain quality employees.
- Many 401(k) plans now allow a participant to designate part or all of his salary deferrals as after tax Roth contributions.
This plan can be set up by any type of business including sole proprietorships, partnerships, and corporations.
- Contributions - A 401(k) can accept six types of contributions:
- Employer profit-sharing contributions.
- Employee pretax contributions up to $18,500 (2018).
- Catch-up for those age 50 and older (an additional $6,000 (2018) contribution can be made).
- Matching contributions by the employer.
- After-tax Roth contributions.
- After-tax employee contributions.
- Roth Contributions - If your employer offers a 401(k) plan, you may be able to take advantage of the Roth 401(k) option.
- The Roth option in a 401(k) allows you to designate part or all of your 401(k) contribution as Roth after-tax dollars. If certain requirements are met, the Roth distributions from your 401(k) may be tax-free.
- For example, the most you can contribute to a 401(k) in 2018 is 100% of your pay, up to $18,500, or $24,500 if you are age 50 or older before year-end (your company's plan may have more restrictive limitations). You can designate part or all of your 401(k) contribution as Roth, or as traditional pre-tax contribution.
The total of these six contributions per individual cannot exceed 100 percent of the individual's annual compensation* or $55,000 (2018), whichever is less, plus the catch-up contribution. Total employer contributions (other than salary deferral contributions) cannot exceed 25 percent of all eligible employees' compensation.
* The maximum compensation that may be used is $275,000 (2018).
To be eligible to participate, an employee must be 21 years old and have completed one year of service. A year of service is equivalent to 1,000 hours. An employer can elect a more liberal eligibility requirement.
Employees are immediately vested in salary deferrals and certain qualifying matching and non-elective contributions. All other employer contributions may be subject to the vesting schedule selected by the employer.
The plan must be established by the employer before salary deferrals begin. Salary deferrals must be deposited no later than the 15th business day of the month following the month of deferral. The employer has until the business' tax filing deadline, plus extensions, to fund the employer contributions. Business owners may be required to file Form 5500 with the IRS within seven months after the plan year-end.
This type of plan requires the services of an administrator for the compliance, plan maintenance, record keeping 5500 filing, required testing, etc.
Contact a STRIVE Wealth Advisor for more information about 401(k) plans.