Key Features
- Tax deferred
- Matching employer
contributions
- Excellent retirement
investment
- Non-discrimination rules
A Cash or Deferred
Arrangement, also known as a
"401(k) Plan", is a type of
profit sharing plan under which
employees are permitted to defer
an elective amount of
compensation which is deducted
from current taxable income and
is contributed to the profit
sharing plan on behalf of the
participant. Frequently
employers provide additional
incentive for such employee
salary deferrals by offering
matching employer contributions
which are related to the amount
of the employee's salary
deferred. Thus the name "cash or
deferred arrangement" appearing
in Section 401(k) of the Internal
Revenue Code refers to the
employee's ability to elect to
receive his compensation in cash
or to defer it into the plan.
401(k) plans are generally
appropriate for employers who
are unable or unwilling to
provide substantial retirement
benefits but who desire to allow
employees the ability to make
contributions in amounts larger
than those available to
individuals through Individual
Retirement Accounts. They are
unusually good investments for
those employees who are
interested in investing for
their retirement because it is a
way of purchasing investments
with pretax contributions and of
accumulating their funds
tax-free. At retirement, a
participant's benefit is equal
to the then value of the
accumulated investments held on
behalf of the participant.
The maximum amount of salary
which can be deferred under
Section 401(k) of the Code is
$10,000 per year, as that amount
may be adjusted for cost of
living increases. 401(k) plans
are subject to strict
non-discrimination rules which
require that "non-highly
compensated" employees
participate in the plan at a
rate comparable to the rate at
which "highly compensated"
employees participate. Therefore
401(k) plans exist primarily to
benefit the rank and file rather
than highly compensated
employees.
Because of administrative
complexity and nondiscrimination
rules associated with this type
of program, it is generally a
good idea for employers with 50
or more employees.
401(k) Insurance and
Investment Links
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