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401(k) Plans
Taken from Section 401(k) of the Internal Revenue Code, a 401(k) Plan is a Profit Sharing Plan with a provision that allows employees to defer income on a pretax basis and to have that income invested on their behalf.
Advantages:
 | Allows employees to make pretax contributions. |
| Effective 1/01/06, Roth after-tax deferrals are also allowed. |
| Flexible and discretionary employer matching contributions. |
| Flexible and discretionary employer profit sharing contributions. |
| Discrimination testing can be avoided by incorporating Safe Harbor provisions. |
| Typically provides employees with investment direction. |
401(k) Plans are Ideal For:
| Employers who are initiating a plan due to employee demand. |
| Employers wishing to maximize contributions. |
| Employers wishing for discretionary contributions. |
Disadvantages:
| May be subject to extensive annual testing. |
| Additional administrative cost. |
Following is an example of the income tax effect of a 401(k) Plan:
| After-Tax Savings Plan |
401(k) Plan | |
| Gross Income | 25,000 | 25,000 |
| 401(k) Contribution | 0 | -2,500 |
| Taxable Income | 25,000 | 22,500 |
| Federal Tax (20%) | -5,000 | -4,500 |
| State Tax (5%) | -1,250 | -1,125 |
| FICA Tax (7.65%) | -1,913 | -1,913 |
| Net Income | 16,837 | 14,962 |
| After-Tax Contribution | -2,500 | 0 |
| Spendable Income | 14,337 | 14,962 |
|
Tax Savings |
0 | 625 |
How Complicated are
401(k) Plans?
Without the proper
administrative services, a 401(k) Plan can turn into a nightmare for the plan
sponsor. An integral part of the complexities of a 401(k) Plan is the myriad testing requirements under many Internal Revenue Code Sections. However, if the
proper care is taken during the plan design process, 401(k) Plans can be quite
simple. The key to the design of a 401(k) Plan is meeting the needs of the
specific company and its employees, without making the plan any more complicated
than necessary.
Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff. Our services include all functions necessary for the smooth operation of your plan, including Plan Design, Documentation, Employee Communication, and Complete Administration.
We have the expertise to determine if this type of Plan is for you!
Contact Us Today for a Free Consultation