401k Program

What Is a 401(k) Plan?

By definition, a 401(k) plan is an arrangement that allows an employee to choose between taking compensation in cash or deferring a percentage of it to a 401(k) account under the plan. The amount deferred is usually not taxable to the employee until it is withdrawn or distributed from the plan. However, if the plan permits, an employee can make 401(k) contributions on an after-tax basis (these accounts are known as Roth 401(k)s), and these amounts are generally tax-free when withdrawn. 401(k) plans are a type of retirement plan known as a qualified plan, which means that this plan is governed by the regulations stipulated in the Employee Retirement Income Security Act of 1974 (or ERISA) and the tax code.

Qualified plans can be divided two different ways: they can be either defined-contribution or defined-benefit (pension) plans. 401(k) plans are a type of defined-contribution plan, which means that a participant's balance is determined by contributions made to the plan and the performance of plan investments. The employer is usually not required to make contributions to the plan, as is usually the case with a pension plan (which is one reason such plans are on the decline). However, many employers choose to match their employees' contributions up to a certain percentage, and/or make contributions under a profit-sharing feature. 

 

Contribution Limits

For 2019, the maximum amount of compensation that an employee can defer to a 401(k) plan is $19,000 (up by $500 from 2018). Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000. The maximum allowable employer/employee joint contribution limit is $56,000 for 2019 (up by $1,000 from 2018)  – $62,000 in 2019 for those aged 50 and older. The employer component includes matching contributions, nonelective contributions and/or profit-sharing contributions.