| A 401(k) Plan is an employer-sponsored plan that allows employees to make pretax contributions to their accounts. These contributions are usually made by payroll deductions. The maximum amount that an employee can contribute to a 401(k) Plan in 2008 is $15,500. This limit is adjusted each year to reflect changes in the cost-of-living. Participants age 50 and older can make "catch up" contributions to a 401(k) plan. The maximum "catch up" contribution for 2008 is $5,000.
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.
Advantages
- No employer contributions are required
- The employer can make discretionary matching and/or profit sharing contributions
- Employee participation is optional
- Employees are able to reduce their taxable income and save for retirement
Possible Disadvantages
Plans must satisfy nondiscrimination testing. If the plan fails these tests, corrective action must be taken.
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