What is a 401(k) Plan?
A 401(k) is a defined contribution plan set up by an employer that allows for employees to set aside, on a pre-tax basis, a portion of their compensation for retirement purposes. It also allows the employer to make discretionary employee match and/or employer profit sharing contributions. The investment and earnings within the 401(k) Plan compound and grow tax deferred until withdrawn at retirement. At that time all money that is withdrawn is generally taxed as ordinary income. Except in certain cases, if the participant has not reached age 59½, there is an additional early withdrawal tax of 10%.
Who Can Establish?
No matter how your business is structured, you are eligible to establish a 401(k) plan. Even many types of non-profit organizations are eligible to establish 401(k) plans.
Highlights
Wide range of Eaton Vance funds available for investment.
Third Party Administrator (TPA) is advisable. Complicated discrimination testing, if required, and tax reporting may require the services of an experienced TPA.
A low cost means of providing retirement benefits for employees.
Participants of the plan are permitted to defer a portion of their compensation into the plan on a pre-tax basis reducing their taxable income.
Allows for the business to take a tax deduction on employer contributions.
Attracts new talent to the business and retains the valuable employees that are currently employed.
Optional Features That Are Available Within a 401(k) Plan Include:
- Discretionary employer matching and Profit Sharing contributions
- Vesting schedules for employer contributions
- Participant loans
- Hardship withdrawals
- Roth 401(k) after-tax contributions.
Who contributes: Employee and Employer
Employee contribution limits:
Annual contribution limits: The lesser of 100% of eligible compensation or the applicable annual contribution limit. (See the table below.)
| Year | Annual Elective Deferral Limits |
| 2008 | $15,500 |
In addition to the contribution limits, employees age 50 or over by the end of the tax year can make "catch-up contributions" as follows |
|
| Year | Annual Catch-Up Contributions |
| 2008 | $5,000 |
Employer Contribution Limits: Employer contributions are discretionary and may consist of matching and / or profit sharing contributions and, combined with employee deferrals and forfeitures, cannot exceed the limit under IRS Section 415(c). Catch-up deferrals are not included in this limit. Total deductible Employer contributions to the plan cannot exceed 25% of total eligible compensation of all plan participants (for the sole proprietor, the limit is 20%).
Maximum eligible participant compensation: dollar limit under IRS Code Section 401(a)(17)
Eaton
Vance Distributors, Inc. © 2008 Eaton Vance
Distributors, Inc. - All rights reserved |