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.

Example

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