401(k) Plan 

The 401(k) Plan is an employer-sponsored plan that allows employees to make contributions with pretax dollars. These contributions are generally made by payroll deductions.

The maximum amount that an employee can contribute to a 401(k) Plan in 2002 is $11,000. This limit is adjusted each year to reflect changes in the cost-of-living.

IRS regulations require the use of nondiscrimination tests to determine the maximum contribution levels for highly compensated employees. These tests are designed to ensure that the plan benefits all employees in a nondiscriminatory manner and can make it difficult for some employers to maintain 401(k) plans.

Who Can Offer This Plan: Any size business.

Advantage: Allows greater employee payroll reduction contributions than most other plans and, if the employer chooses, employees may direct the investment of their assets. Appropriate for larger companies who want to share plan funding with their employees. May be combined with employer profit sharing.

Administrative Expense: Moderate to High.

Administrative Complexity: Moderate to High.

Funding: Pretax employee contributions, and if chosen by the employer, employer matching contributions.

Annual Contribution Limits: Employee: $10,500 per year (indexed). Employer and Employee Combined: Lesser of 25% of the participant's compensation or $30,000.

Annual Deduction Limit: Company can only contribute and deduct up to 15% of total participant compensation. Included in this 15% are employee pre-tax contributions.

Participant Loans: Participant loans may be a feature of the plan.

In-service Withdrawals: In-service withdrawals for hardship or after age 59 1/2 may be a feature of the plan.

Vesting: Immediate for employee contributions. Employer matching contributions may vest immediately or over years of service not to exceed seven years.