More and more employees perceive 401(k) plans as a valuable benefit
which have made them the most popular retirement plans today. Employees
can benefit from a 401(k) plan even if the employer makes no contribution.
Employees voluntarily elect to make pre-tax contributions through payroll
deductions up to an annual maximum limit ($15,000 in 2006 and $15,500
The plan may also permit employees age 50 and older to make additional
"catch-up contributions" up to an annual maximum limit ($5,000 in 2006 and
Often the employer will match some portion of the amount deferred by the
employee to encourage greater employee participation, i.e., 25% match on
the first 4% deferred by the employee. Since a 401(k) plan is a type of
profit sharing plan, profit sharing contributions may be made in addition to
or instead of matching contributions. Many employers offer employees the
opportunity to take hardship withdrawals or borrow from the plan.
Employee and employer matching contributions are subject to a special
nondiscrimination test which limits how much the group of employees
referred to as "Highly Compensated Employees" can defer based on the
amount deferred by the "Non-Highly Compensated Employees." The plan
may be designed to satisfy "401(k) Safe Harbor" requirements (certain
minimum employer contributions and 100% vesting of employer
contributions) which can eliminate this nondiscrimination test.
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