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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 may 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.

Solo 401(k) Spotlight:

Employer contributions to a Solo 401(k) are tax-deductible, plus salary deferrals are deductible, benefiting both your business and you!

Any earnings within the account enjoy tax-deferred growth until withdrawn.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).

Safe-harbor plans must be established by October 1st.

Other Key Advantages

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

Contribution Flexibility

  • Employee contributions — Eligible employees can elect to defer up to 100% of their compensation up to a maximum of $18,000 for 2016 and 2017. Employees age 50 and older can make additional catch-up contributions up to $6,000 for 2016 and 2017.
  • Employer contributions — Employers may contribute, on behalf of each eligible employee, up to 25% of their compensation or $53,000 (less employee contributions) for 2016 and $54,000 (less employee cointributions for 2017, whichever is less.
  • Total contribution limit —Total (aggregate) contributions for each employee cannot exceed $53,000 (plus catch-up contributions) for 2016 and $54,000 (plus catch-up contributions) for 2017.

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401(k) Contribution Limits 2016 2017
Eligible Employee Contributions $18,000 $18,000
Catch-up Contributions (age 50 and older) $6,000 $6,000
Employer Contributions Variable

(employee contributions affect the amount an employer can contribute)

(employee contributions affect the amount an employer can contribute)
Total aggregate contribution limits
(employee + employer)

($59,000 including catch-up contributions)

($60,000 including catch-up contributions)

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