401(k) Plan

The uncertain economic environment of the past several years has brought concern for the future to the forefront of the American mind. As saving money has grown more important than ever, the 401(k) plan has become one of the most popular methods through which employees may put aside savings for their retirement.

The 401(k) plan is a retirement savings plan which allows employees to put aside “contributions,” or percentages of their earnings, into a 401(k) account. These contributions are made on a post-tax and/or pre-tax basis and are “deferred” directly into the account in lieu of wages. These funds are then distributed through a various selection of investment options including stocks, bonds, and other money market investments either chosen by the employee themselves or though trustees chosen by the employee. The company’s own stock is often included in the investment options. The employee or representative trustee may chose to re-allocate money among the selected investments at any time.

Employers have the option of matching or contributing funds to employee 401(k) accounts as an additional benefit. These contributions may be used effectively as performance incentives and may be tied to particular company goals. The option to utilize a profit sharing plan is available as well. Employers may want to instigate a vesting schedule; a tiered schedule in which the employee gains ownership of the 401(k) funds by increasing percentages over a period of time.

There is a limit to how much can be contributed to a 401(k) plan per year. In 2006, the limit was $44,000 or 100 percent of the employee’s annual salary, whichever was smaller. This is known as the 415 limit.

401(k) plans will often allow for a “hardship withdrawal,” however the funds available for this are usually limited to the employer contributions and do not include the amounts deferred from the employee’s own income. If an employee decides to collect their 401(k) savings before turning 59 ½, they must pay an early distribution penalty of 10 percent.

Here at William J. King & Associates, we have the experience and expertise to help you discover and maintain the 401(k) plan that will be best for your business.

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