A 401(k) plan is a type of defined contribution retirement plan that allows workers to contribute a portion of their income on a pre-tax basis. The myriad of rules and regulations applicable to 401(k) plans is complex and the penalties for noncompliance can be substantial. The Watkins Ross team assists our clients in complying with the regulations in a cost and time-efficient manner, and we work with them to ensure their 401(k) plan meets the needs of the employees and the objectives of the employer.
In a traditional 401(k) plan, the employee generally does not pay any income tax on the amount they contribute to the plan until it is withdrawn from the plan, presumably at retirement. Additionally, all earnings on the contributions to the plan also accumulate on a tax deferred basis. Employers are responsible for withholding the contributions from an employee’s pay and submitting the contributions to the plan. Generally, an employee is eligible to contribute up to $18,000 (and in some cases up to $24,000) of the employee’s compensation to a 401(k) plan each year. A Roth 401(k) plan is similar to a traditional 401(k), but the employee’s contribution is made on an after-tax basis. The Roth contributions and earnings may be withdrawn tax free, provided the employee has met certain criteria for receiving the distribution.
In addition to employee contributions, employers may also choose to contribute discretionary matching and/or profit sharing contributions. Matching contributions are based on the amount an employee contributes, but Profit Sharing contributions may be made to an employee’s account regardless of whether the employee contributed any of the employee’s own money. As with most employer contributions to a qualified plan, matching and profit sharing contributions are generally tax deductible to the employer. All 401(k) plans must be part of a defined contribution profit sharing plan.
Check out the IRS' 401(k) information page at www.irs.gov/retirement-plans/401k-plans.