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401(k) General Plan Guidelines

401(k) Plan Eligibility

Generally, any business may have a 401(k) plan. In establishing a plan, the employer sets the eligibility requirements. For example, employees under the age of 21 or who have not accrued one year of service may be excluded.

Tax Advantages

As an employer, you normally can deduct contributions you make on behalf of your employees from your business expenses.

Any eligible employees can elect to defer part of their salary and direct that money into 401(k) accounts. Because these contributions are deferred before certain taxes are withheld, they actually reduce contributing employees' taxable income. Any earnings within the account enjoy tax-deferred growth until withdrawn.

Employees can also elect to defer part of their salary into a Roth 401(k) account. Roth 401(k) account contributions do not reduce an employee's taxable income, however qualified distributions (including earnings) are tax-free.

Establishment Deadlines

Employers who want to establish a 401(k) plan must do so by the last day of the plan year (usually the calendar year).

Contribution Flexibility

  • Employee contributions — Eligible employees can elect to defer up to 100% of their compensation up to a maximum of $17,500 for 2014. Employees age 50 and older can make additional catch-up contributions up to $5,500 for 2014.
  • Employer contributions — Employers may contribute, on behalf of each eligible employee, up to 100% of the employee's compensation not to exceed $52,000 for 2014.
  • Total contribution limit — Aggregate contributions for each employee cannot exceed $52,000 for 2014 plus catch-up contributions.

Other Key Advantages

  • Allows for profit-sharing contributions
  • Vesting schedule applies to employer contributions
  • Loans, hardship withdrawals, and Roth contributions are allowed