401(k) Plans

business people group on meeting and presentation in bright modThis is a common type of employer-provided retirement plan, especially among large corporations, but it can be set up for any size of company. It is named after subsection 401(k) of the Internal Revenue Code.

In 2015 and 2016, the most an employee can contribute is $18,000 ($24,000 if age 50 or older). Many employers match their employees’ contributions, but this is not always required, depending on how much is contributed by highly compensated employees vs. rank-and-file employees.

Complex IRS rules called “top-heavy testing” strive to balance the benefits of a 401(k) plan among all employees rather than favoring company owners and other high-income employees. Many companies elect to avoid top-heavy testing through Safe Harbor 401(k) plans, which require a certain level of employer matching contributions. They also require immediate vesting, which means employees can take all employer contributions attributed to their account when they terminate service, no matter how long they worked for the employer. One example of a Safe Harbor contribution is a dollar-for-dollar match up to 4% of the employee’s compensation.

Employers can make additional contributions to the plan on behalf of employees, but the total of all employer and employee contributions combined cannot exceed $53,000 in 2015 and 2016 ($59,000 for employees age 50 or older). 401(k)s can be expensive and complicated to administer, and employers can be held liable for not fulfilling their fiduciary duties to the plan, such as periodically reviewing investment options and administrative fees.

Employees are limited to the investment options and plan provisions chosen by the employer. Optional plan provisions include the ability to take loans from the plan or to make Roth 401(k) contributions. Roth contributions are not tax deductible, but can be withdrawn tax-free at retirement age, like a Roth IRA.

For more info on 401(k) plans, click here.

403(b) Plans

Teacher Reading With Male Pupil In Class403(b) plans are very similar to 401(k) plans but are designed for certain non-profit organizations such as schools, hospitals, charities, and religious organizations. They are named after subsection 403(b) of the Internal Revenue Code.

In 2015 and 2016, the most an employee can contribute is $18,000 ($24,000 if age 50 or older). Some 403(b) plans allow employees to make additional contributions beyond the normal limits if they have completed at least 15 years of service.

The employer may make matching contributions or additional discretionary contributions on behalf of the employee, but the total of all employer and employee contributions combined cannot exceed $53,000 in 2015 and 2016.

For more info on 403(b) plans, click here.

457(b) Plans

Female lawyer with German civil law code - only torso to be seenThese are also known as Deferred Compensation Plans and are named after section 457(b) of the Internal Revenue Code. They can only be used by state and local governments, as well as certain tax-exempt organizations.

As with 401(k) or 403(b) plans, each eligible employee can make a tax-deductible contribution up to $18,000 in 2015 and 2016.

 

For more info on 457(b) plans, click here.

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Retirement Fundamentals
Insurance Fundamentals