One of the most popular retirement plans in existence today is the traditional 401(k) plan. Each plan is governed by an IRS approved plan document that can be designed with specifications to meet the unique needs of each individual company.
Plan Eligibility
Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, may establish a 401(k) plan. All eligible employees must be allowed to participant in the 401(k). An eligible employee is any employee who: is at least 21 years old has performed one (1) year of service, and worked 1,000 hours in the year beginning with the date of hire. Union employees and non-resident aliens who have no U.S. source of income may generally be excluded from coverage. Note: An Employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.
Tax Advantages
The Traditional 401(k) Plan allows eligible employees to contribute a portion of their salary to a retirement plan. Employers may choose to contribute either matching or non-elective amounts to the plan on behalf of eligible employees. Employer contributions are tax deductible for the Employer – up to 25% of compensation of all participants. Employee elective deferrals are excluded from the employee’s income for federal income tax purposes. Tax-deferred growth potential is possible – any investment earnings grow tax deferred until withdrawn from the plan.
Vesting
Vesting is the participant’s ownership in the value of his/her retirement account or benefit. The employer can choose from many available vesting schedules. The schedule selected applies to all employees.
Compliance Testing
Traditional 401(k) plans are subject to certain nondiscrimination tests to ensure that deferred wages and employer contributions do not discriminate in favor of highly compensated employees.
