These plans fall under the Profit Sharing Plan rules and allow employees to contribute a portion of their salary into a 401(k) retirement plan. The plan may allow contributions on either a pre-tax basis or an after-tax basis based on the options of the plan. The employee elects to have a portion of their income deferred into the plan and receive the benefit of the tax deferral of all earnings in the plan until distribution is made. The maximum annual deferral amount is indexed by the government each year for cost of living adjustments. Employers may choose to contribute a matching contribution based on what the employee defers.
The plan has non-discrimination rules that apply annually to the deferral and matching contributions. The employer may also contribute a profit sharing contribution in addition to the matching contribution under this plan. A review of the employer’s objectives can help determine the best plan options to utilize. This type of plan helps employees get involved in saving for retirement and is designed to help them accumulate capital faster.