401(k) Plan

Definition

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Explanation

One of the major benefits of a 401(k) plan is the plan sponsor’s ability to allow participants to direct their own investments, provided the sponsor makes available a diverse lineup of investment options from which participants may choose. Contributions limits to 401(k) plans vary based on plan design choices, but typically follow the pattern where the greater the company’s guaranteed contribution and the shorter the vesting schedule for company contributions, the greater the contribution limits will be for more highly compensated employees.Employees are always entitled to, or fully vested in, their contributions to the plan, but time limits may be placed on the company’s contributions in order to incent workplace loyalty. There are also restrictions on how and when employees can withdraw these assets, and penalties may apply if the amount is withdrawn while an employee is under the retirement age as defined by the plan.

 

 

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