A 401(k) plan is a special type of profit sharing plan that allows employees to voluntarily defer receipt of a portion of their pay and contribute to a retirement plan. A 401(k) plan offers flexible and fully tax deductible employer contributions such as a matching contribution or profit sharing contribution together with tax sheltered growth of plan assets.
The employees will benefit by making pre-tax contributions and with tax-sheltered accumulation of contributions to the plan.
401(k) profit sharing plans may offer employee 401(k) deferrals and rollovers, employer profit sharing contributions, matching contributions, top-heavy minimum contributions and safe-harbor contributions.
- Employees elect to make pre-tax contributions to the plan rather than taking the contributions in cash
- The employee does not pay current federal and California state income taxes on their elective deferrals
- The participant does pay FICA and FUTA taxes on their contributions
- Contributions accumulate tax-deferred until withdrawn from the plan
- Contributions do not incur taxes for capital gains, dividends and interest income as long as the funds remain in the 401(k) plan
A matching contribution is an employer contribution based upon 401(k) deferrals made by the employee. If the employee does not contribute, they do not receive a contribution. A profit sharing contribution is made to all eligible participants regardless of whether they contribute 401(k) deferrals.
Pacific Retirement Plans can assist the employer in establishing a 401(k) plan with multiple fund families, daily valuation, Internet and 800-number access. We can evaluate 401(k) testing problems and suggest changes that may permit owner/employee's to make a greater contribution to the plan.
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