MoneyWatch

Athena financial & insurance services, inc.

Registered Investment Advisors
Text Box: What has 420,000 plans, 44 million participants and $2 trillion in assets? 401(k) retirement plans, the most popular form of pension program presently offered by almost half of all American companies. If your employer doesn’t yet offer a 401(k) it’s probably because they don’t understand how simple and inexpensive setting up and maintaining a plan can be. IRS pre-approved plans are available through investment advisors, brokerage firms, insurance companies and banks and the annual cost to administer plan can run $1,500 or less for small firms. The main reason most employers offer 401(k) plans is to attract and retain quality employees. But the benefits don’t stop there. I’ve often referred to 401(k) plans as the “last government giveaway program around” and “a tax shelter for the little guy.” Here’s why: 401(k) plans benefit a mix of rank-and-file employees and owner/managers and allows participants to decide how much to contribute to their accounts on a before-tax basis. Each employee participates at their own pace and is allowed to contribute 100% of their salary up to $15,000 per year. If they are age 50 or older they can contribute $20,000 per year. Employers are also entitled to a tax deduction for the matching contributions they may make to employee accounts and for any administrative costs they incur. If the employer decides to match employee contributions they are free to change the matching amount or discontinue it altogether on a yearly basis. The money contributed to the plan (hopefully) grows through investments in stocks, mutual funds, money market funds, savings accounts, and other investment vehicles. Contributions and earnings are not taxable until they are distributed. Most 401(k) plans allow participants to take their benefits with them when they leave and account balances can also be made available in an emergency through loans or hardship distributions. There are three basic type of 401(k)’s; traditional, safe harbor and SIMPLE. A traditional 401(k) plan offers the most flexibility. Employers have discretion to make contributions on behalf of all participants, to match employees’ deferrals, or do both. These contributions can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). In addition, a traditional 401(k) allows participants to make pre-tax contributions through payroll deductions. Annual testing ensures that benefits for rank and file employees are proportional to benefits for owners/managers. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. However, the safe harbor 401(k) is not subject to many of the complex tax rules that are associated with a traditional 401(k) plan, including annual nondiscrimination testing. SIMPLE 401(k)’s are probably the least common type of 401(k) plan, even more so with the introduction of safe harbor plans a few years back. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to the traditional plans. Similar to a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5000 in compensation from the employer and don’t receive any contributions or benefit accruals from any other pension plans maintained by employer. For more information on 401(k) plans and their advantages contact your investment professional. ▲

Saving for your golden years...

Volume 17, Issue 14

July 17, 2006

401(k) Retirement Programs