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401(k) PLANS

401(k) Savings Plan. A 401(k) plan is a type of profit sharing plan that allows employees to make pre-tax contributions (elective deferrals), generally on a payroll deduction basis. Participating employees elect to defer a portion of their compensation, which the employer contributes on their behalf, to the qualified profit sharing plan. In doing so, they avoid current income tax on the deferred amounts and on any earnings the deferred monies generate. No tax is due until the benefits are distributed.

The typical 401(k) arrangement allows for several types of employer contribution alternatives. Most employers provide matching contributions based on the employee's elective salary deferral as an incentive for the employee to participate. Not only does a matching contribution tend to increase the number of employees who elect to defer, it also tends to increase the dollar amount they defer. In addition, the employer can make a discretionary profit sharing contribution, independent of elective or matching contributions, using any of the available profit sharing allocation methods.

Participants can defer up to $16,500 (the indexed dollar limit for 2009). The annual limit for total allocations to an individual participant’s account (to include all defined contribution plan accounts) is 100% of their compensation up to a maximum of $49,000 for 2009. This includes all employee and employer contributions, plus any reallocated forfeitures of terminated participant accounts. The employer’s contribution limit, the total of all matching and profit sharing as described in the section on profit sharing plans, is 25% of the total eligible payroll. Employee elective salary deferrals are not included in this limit.

In addition to these limits, the Highly Compensated Employee (HCE) group may face limits imposed by non-discrimination tests.

Highly Compensated Employees Include:

1.        A 5% or more owner;

2.        Any employee who earns $110,000 (Indexed figures for 2009)  

REGULAR 401(K) PLANS:  Allow the employer to provide a retirement benefit to their employees by letting participant's defer a portion of their otherwise taxable income into a qualified retirement plan (maximum deferral is $15,000 for 2006, $15,500 for 2007 and 2008, $16,500 for 2009), then adjusted for the cost of living in $500 increments).  The company is also allowed to make a tax-deductible contribution to all or a portion of the participant deferrals.

SIMPLE 401(K) PLANS:   

Allow the employer to make a choice of one of two mandatory contributions in exchange for automatic passing of the nondiscrimination testing mandated by the IRS.  The employer must either 1) contribute a flat 3% to all eligible employees or 2) make a matching contribution (to the employees who elect to defer) of 100% up to 3% of the employees pay and then an additional match of 50% on the next two percent they defer.  The company cannot make any additional contributions.

SAFE HARBOR 401(K) PLANS:

Are very similar to Simple 401(k) Plans only they allow the company to make additional employer profit sharing or matching contributions.

SAFE HARBOR NEW COMPARABILITY 401(K) PLANS:  

Allow the employer to contribute 5% to all eligible employees and then in most situations maximize the contributions to the key employees at the lesser of $49,000 or 100%.

401KSOP PLANS:  

Allow the employees and the employer to invest a portion of their contributions to the plan in company stock.

INDIVIDUAL 401(k)

Who’s Eligible?

Key Benefits:

• Higher contribution limits (2009):

          Maximums: $49,000, $54,000 for age 50 and older

• Loan provisions:

          Participants can’t borrow from a SIMPLE or SEP IRA.  With the Individual 401(k)       
          Plan, they can take a loan of up to 50% of plan assets or $50,000, without any IRS 
          penalties or taxes.

• Rollover capability:

         Most forms of retirement plans are eligible to rollover into the Individual 401(k) Plan, 
         including SIMPLE IRAs, SEP IRAs, Profit Sharing and Money Purchase plans, 
         Traditional and ROTH IRAs; and most forms of 457 and 403(b) plans.

• Online access and transactions:

          A simple, online record keeping system lets the Individual 401(k) Plan offer 
          information and transaction capability 24 hours a day, helps eliminate errors, and 
          offers unparalleled flexibility to owner-only businesses.

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