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More and more employees perceive 401(k) plans
as a valuable benefit which have made them the most popular
retirement plans today. Employees can benefit from a 401(k)
plan even if the employer makes no contribution. Employees
voluntarily elect to make pre-tax contributions through payroll
deductions up to an annual maximum limit ($11,000 in 2002,
$12,000 in 2003).
Beginning in 2002, employees age 50 and older
will be able to defer an additional $1,000 (referred to as
"catch-up contributions"). The catch-up contribution
amounts increase after 2002 by $1,000 each year until reaching
$5,000 in 2006.
Often the employer will match some portion
of the amount deferred by the employee to encourage greater
employee participation, i.e., 25% match on the first 4% deferred
by the employee. Since a 401(k) plan is a type of profit sharing
plan, profit sharing contributions may be made in addition
to or instead of matching contributions. Many employers offer
employees the opportunity to take hardship withdrawals or
borrow from the plan.
Employee and employer matching contributions
are subject to a special nondiscrimination test which limits
how much the group of employees referred to as "Highly
Compensated Employees" can defer based on the amount
deferred by the "Non-Highly Compensated Employees."
The plan may be designed to satisfy "401(k) Safe Harbor"
requirements (certain minimum employer contributions and 100%
vesting of employer contributions) which can eliminate this
nondiscrimination test.
Contact us to help set up a
Profit Sharing plan for your company.
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