9.6.1 Cash or Deferred Arrangements - 401(k) Plans
Employees can take the money as usual in their paycheck or they can voluntarily defer a specific amount (the employee decides how much) from their paycheck to put in a 401(k) account and save for retirement. The employee tells the employer how much he/she wants to contribute - up to $17,000 limit in 2012* ($22,000 for those age 50 and older).
*($16,500 in 2011)
Typically, the employer will match the contribution made by the employee (usually at 50 cents on the dollar). The amounts deferred are not included in the employee's gross income and the funds and earnings are not taxable until distribution. 401(k) plans must be part of a profit sharing or stock bonus plan and the following additional set of rules must be adhered to.
- Amounts deferred can be distributed penalty free because of retirement, death, disability, separation from service, or attainment of age 59 1/2.
- Employee deferred contributions are nonforfeitable.
- Special nondiscrimination requirements must be met to prevent highly compensated employees from deferring disproportionately higher amounts of their salaries.
