Skip to Content

401(k) Plan

Last Updated January 15, 2014

Definition

A qualified retirement plan established by an employer (business) for its employees. Under a 401(k) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as salary-deferral contributions, and can be made on a pre-tax and/or post-tax basis.

Earnings in a 401(k) account grow on a tax-deferred basis and distributions are treated as ordinary income when distributed from the account.

Referring Cite

IRC § 401(k)

Additional Helpful Information

  • Individuals may defer up to 100% of their compensation up to the dollar limit that is in effect for the year. Individuals who reach age 50 by the end of the year may defer additional amounts referred to as ‘Catch-up’ contributions.
  • The dollar limits are available here
     

These are the limits established under federal law. However, an employer may elect to reduce the percentage of salary that an employee may defer to his/her 401(k) account. For instance, the plan may be designed to limit salary deferrals to 10% of compensation. In such a case, if the individual’s compensation for the year is $70,000, the maximum amount he/she can contribute as salary deferral contributions for the year is $7,000 ($70,000 x 10%). Plans may be designed to allow participants to make after-tax salary deferral contributions.

  • The aggregate/total contributions to a participant’s 401(k) account cannot exceed the annual addition limit that is in effect for the year. The limits are :