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Deferred Compensation Plan (401k)


Deferred compensation plans are employee benefit plans, authorized by various Internal Revenue Code Sections, under which employees may contribute a percentage of wages to tax deferred savings plans rather than receive the amounts as current compensation. The most commonly used deferred compensation plan is the 401(k) plan (so named for its IRC section).

Employee contributions to 401(k) plans are exempt from federal income tax and, in some states, state income tax, withholding but are not exempt from FICA withholding. Employer contributions, made on behalf of the employee, are also exempt from federal income tax withholding. Contributions and earnings thereon accumulate tax free until distributed to the employee at retirement.

The maximum amount that an employee can elect to defer for 2007 under a 401(k) plan in which the employee participates is $15,500. The limit is adjusted annually for inflation. The amount that an employee may actually defer, however, is usually lower as typical plan terms limit contributions to the lower of a specified percentage of current wages or the statutory maximum.

No special permission is required from the IRS to implement a 401(k) plan but the regulations surrounding these types of plans are so voluminous and complicated that a qualification ruling is usually sought.

Deferred compensation plans have strict requirements as to eligibility, participation, vesting, non-discrimination, withdrawal of funds, and annual reporting and legal advice should be sought in their institution.


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Helpful Hint... Anytime you move or have a major life change (for example - marriage, divorce, birth of a child, etc.) always be sure to complete a new W-4!