A 401k retirement plan offers tax deductible contributions, tax deferred growth and taxable distributions. Any business, whether a C Corporation, S Corporation, partnership, sole proprietorship, or self-employed can establish a 401k retirement plan.
The company sets the eligibility requirements, within certain guidelines, at the time the company 401k retirement plan is established. If they wish, the employer can restrict individuals with less than 1 year service, union members, non US citizens, part-time workers etc., from being eligible for the plan. Contributions to a company 401k retirement plan can come from voluntary employee salary reduction or from the employer, or both.
For 2011, each individual employee can defer up to 100% of their pre-tax income into the 401k retirement plan up to a maximum of $16,500 per year ($21,500 if over age 50).
However, within basic plans, the company owners, officers and highly compensated employee contribution levels are relegated to a percent multiple of the average contribution level of the other employees. Employer may have some obligation to contribute if the plan is deemed top heavy. Employees are immediately 100% vested with their own salary reduction tax deferred contributions; when, as and if they leave their company employ they can rollover their account to their own individual personal IRA, or perhaps to a new company's 401k retirement plan. Withdrawal before age 59 1/2 may be subject to 10% penalty.
Employers can establish a vesting schedule, within certain guidelines, for the contribution the company(s) make to their employees' 401k accounts. Employers are not required nor obligated to make any contribution to their employees' accounts. 100% of the contributions to the company 401k retirement plan can come strictly by individually elected salary deferral; however, if the employer voluntarily at their sole discretion elects to contribute for any one employee then they must put in the same percent of income for all employees, regardless of whether the employee contributes to the plan.
For 2011, total contributions (employee and employer) cannot exceed $49,000.
Safe Harbor 401k retirement plans are available which require the employer to offer contribution matching up to certain limits. This matching is then required only for the employees who elect to be participants in the plan. If this plan is adopted, contribution restriction limits for owners, officers and highly compensate are eliminated.
Owners Only Plans. Starting in 2002, a solo 401k retirement plan is available which is designed exclusively for various types of businesses and sole proprietors having owners only with no other employees that work for more than 1000 hours per year, excluding spouses. Full contribution limits are available for participants in this type of plan. Salary deductions payments to the 401k retirement plan can only come directly from the company.
Full ERISA requirements and annual IRS 5500's series of filings apply. These plans usually are best for larger companies because of the costs associated with documentation preparation by an attorney, costs associated with setting up the 401k retirement plan and the costs associated with administering the plan. Turnkey 401k retirement plans are available.
Generally, outside third party administrators are hired to oversee administration, i.e., the requirements of the plan, top high testing and the like. 401k retirement plans can be add-ons to Profit Sharing or Defined Benefit Plans.
Numerous 401k provider mutual funds and variable annuities are available to fund these plans. Investment choices within plans can include: mutual funds, variable annuities, group annuities, fixed annuities, individual stocks, bonds, company stock etc. Some plans offer very limited investment funding choices, coupled with infrequent opportunity to switch investment choices within the plan; others offer a wide range of investment choice within the plan, with totally flexibility to switch investments within the plan investment choices. Some 401k retirement plans permit participant directed individual stock transactions, and some permit company stock purchase within the plan. Some providers, i.e., mutual fund, life insurance companies, offer credits to new accounts to offset expenses associated with account transfers from one mutual fund, variable annuity company to another. Some plans permit direct loan, hardship loan, disability loan provisions.
Participants can start, stop contributions to a plan during the course of the year, as determined by the company. Plans are subject to top heavy testing and discrimination testing. Plans can be switched from one mutual fund to another mutual fund company or to a variable annuity, or visa versa. In some cases, a 401k retirement plan can be terminated and another more efficacious and cost effective plan can be instituted. Effectively, most plans can offer a wide range of investment choices within mutual funds and variable annuities, since in many cases these mutual funds and variable annuities have "investment only features" allowing them to simply act as "another" investment choice for an existing plan.
Links to 401K providers and 3rd Party Administrators can be found on www.insuranceonlinesite.net/wallstreet.htm
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