A 401(k) Plan allows employees to contribute a portion of their
own incomes toward their retirement. The employee contributions,
not to exceed the limits below, reduce a participant's pay before
income taxes, so that pre-tax dollars are invested. Employers may
offer to match a certain percentage of the employees' contribution,
increasing participation in the plan. For more 401(k) information.
The amount an employee may contribute, or "defer", is
Year Limit 50 or older*
2002 11,000 12,000
2003 12,000 14,000
2004 13,000 16,000
2005 14,000 18,000
2006 15,000 20,000
* If you are 50 or older is determined on the last day of the Plan's accounting
year. If you know you'll be 50 by then, you may take advantage of the new limits
now. These increased limits are known as "catch up" limits. Deferrals
made under these increased limits are generally disregarded when applying the
various compliance tests.
401(k) Plans are subject to special Non-Discrimination rules. These are some
things Employers should know before starting a Plan.
A new planning opportunity opened up with the passage of EGTRRA. The limit on
contributions to Profit-Sharing Plans, of which 401(k)s are a subset, is 25%
of eligible employees' compensation. EGTRRA provides that 401(k) deferrals are
not counted against the 25% of pay limit.
If you're a one person company, you may consider adopting what some are calling
a "Uni-K". (I don't know if this is a Trademark) It is simply a one
person 401(k) Plan.
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