Flashcards in Ch. 20 Section 401(k) Deck (21):
profit sharing or stock bonus plan that gives plan participants the option to:
put money in the plan OR
receive the same amount as taxable cash compensation
What types of 402k's are there?
traditional, roth, simple, and safe harbor
What are 401k's sometimes called?
What type of employer cannot use a 401k?
What testing is used for elective deferrals?
1. tax deferred savings
2. gives employees a choice
3. employer can contribute and deduct up to 25%
4. employees can contribute via salary reductions
5. in-service withdrawals for certain hardships may be permitted
1. acct balance may be inadequate at retirement
2. limited employee pre-tax salary reduction
3. costly and complex
4. employee bears risk
What is the employee's annual pre-tax reduction limit?
$16,500 and $5,500 catch up provision for employees 50+
When must an employee elect the salary reduction?
BEFORE compensation is earned
Participant is ___ vested
How is the balance usually distributed?
lump sum at retirement
Can they make contributions to a deemed IRA?
For lower-income taxpayers, what can contributions count toward?
a nonrefundable savers credit
4 ways for employer contributions
1. formula matching
2. discretionary matching
3. pure discretionary or profit sharing
4. formula contributions
the employer matches employee salary reductions, either dollar for dollar or under another formula
the employer has discretion to make a contribution to the plan each year.
The employer contribution is allocated to each account in proportion to the amount elected in salary reduction
What kind of 401k plans permit in-service withdrawals for elective deferrals?
traditional, simple, and safe harbor
What exceptions allow elective deferrals not have a penalty?
1. retirement, death, or disability
3. employee reaches age 59 1/2
What two conditions must be met in order for something to be considered a hardship?
1. the distribution must be necessary in light of immediate and heavy financial needs of the employee
2. funds must not be reasonably available from other resources of the employee
What withdrawals are exempt from 10% penalty?
1. employee reaches age 59 1/2
2. employee death or disability
3. part of a series of substantially equal periodic pmts following the separation from service
4. is paid to the employee after separation from service and attains age 55
5. does not exceed the amount of medical expenses that are deductible as itemized expenses