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Qualified Plans

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401(k) Plans

Elective Deferrals:

The employer generally makes contributions on behalf of employees to a qualified plan.

However, a qualified plan may also allow employees to contribute part of their before-tax compensation to the plan instead of receiving it in their paycheck.

This type of plan is commonly known as a 401(k) plan; the before-tax contributions are called elective deferrals.

Self-employed persons may contribute part of their before-tax net earnings to a 401(k) plan. Employers that are corporations and partnerships can also have a 401(k) plan.

Elective deferrals: An individual elects (chooses) to put off (defer) receiving part of his/her compensation in cash and paying the taxes currently, with the expectation of receiving the money at a future date, including any accumulated earnings, and paying the taxes then.

No tax deduction for employees: Since an elective deferral is compensation which has been excluded from an employee's gross wages and is not subject to income taxes, the employee cannot deduct such contributions on his/her tax return.

SIMPLE 401 (k) Plans

You can adopt a SIMPLE plan as part of a 401(k) plan (SIMPLE 401(k)) if you had 100 or fewer employees who earned $5,000 or more in compensation during the preceding year.

A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules for qualified plans, with some exceptions (see box below).

A SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules associated with qualified plans if certain conditions are met.

The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans.

Matching Contributions

Your plan can permit the employer to make matching contributions on behalf of employees who make an elective deferral to the 401(k) plan.

For example, the plan can provide that the employer contribute 50 cents for each dollar the employee contributes.

Nonelective Contributions

You can also make contributions for your participating employees, other than matching contributions, without giving them the choice to take cash instead in their paychecks.

Qualified Plans: Limit on Elective Deferrals; Catch-Up Contributions for a 401(k) Plan; Employee Compensation Limit; Form W-2 Reporting for Elective Deferrals; Automatic Enrollment in a 401(k) Plan

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