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Employee 401(k) Plans
A 401(k) plan is an employer-sponsored plan that allows employees to make contributions with pretax dollars. These contributions are typically made by payroll deductions. Additionally, employers may make profit sharing or matching contributions. Generally, any non-governmental business can establish a 401(k).
401(k) rules for 2008 permit eligible employees to make payroll
deductions up to the lesser of 100% of pay or $15,500 (plus
a $5,000 age 50+ catch-up). Non-discrimination testing may limit
the payroll deduction contribution that can be made by highly
compensated employees to less than 100% of pay. The employer
may elect to make a deductible profit sharing or matching contribution
up to 25% of compensation. Total combined payroll deduction,
profit sharing and matching contributions cannot exceed $46,000
($51,000 for those age 50 or older at year-end).
401(k) plans provide several advantages:
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Allow
both employee salary deferral and employer contributions
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A
high degree of design flexibility
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The
employer may apply eligibility criteria
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Flexible
vesting schedules
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Loans
available
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Alternative
employer contribution allocation methods are permitted
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Businesses that should consider establishing a 401(k) plan are organizations that would like a retirement plan that can be funded through employee and employer contributions.
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