What is a 401(k) Plan?
What is a 401(k) Plan?
The 401(k) plan is an arrangement that allows employees to choose between taking compensation in cash or deferring a percentage of it to an employer-sponsored retirement account. If an employee chooses to defer, the amount will be deducted from his or her paycheck before taxation. All 401(k) plans must adhere to the federal regulations contained in the tax code and in the Employee Retirement Income Security Act (ERISA).
Defined-Contribution Pension Plans
The 401(k) plan is a type of defined-contribution pension plan. This means that the account holder’s balance is entirely determined by his or her contributions and the performance of investments. Furthermore, unlike a standard pension plan, employees are not required to make contributions themselves, although many workers have an incentive to do so as some employers match their employees’ contributions up to a certain amount.
There is also a maximum amount of compensation that employees can defer to their 401(k) plans every year. For both 2016 and 2017, the amount is $18,000, although employees who are 50 years or older can make additional contributions of up to $6,000. The maximum allowable joint contribution from both employers and employees is $53,000 for 2016 and $54,000 for 2017.
Distributions
Distributions cannot begin until a triggering event has occurred, such as:
When the employee retires, passes away, becomes disabled, or ceases to work with the employer;
When the employee turns 59 1/2 years old;
When the employee experiences a specific hardship; and
Upon the termination of the plan.
If an employer chooses to do so, he or she can also give employees loans from their 401(k) plans. If provided with this option, employees can borrow up to 50 percent of their balance as long as the amount does not exceed $50,000 and is repaid within five years. In these situations, employers must assign an interest rate that is comparable to the rates charged by lending institutions for similar loans.
How a Member of the CORE Financial Management Team Can Help
If you are an Oklahoma business owner, it is important to have a good grasp on the intricacies of which special taxes need to be paid and what tax forms should be completed and submitted. For advice or assistance with these types of issues, please contact the CORE financial management team to schedule a consultation with a dedicated employee who can explain your options. We can be reached at our Oklahoma City office at 405-288-1207 and at our Tulsa office at 918-209-3441. To reach someone at our Lawton office, please call us at b to set up an initial meeting.
