Harnessing the Power of 401(k) Plans

401(k) Plans — An Overview

A 401(k) plan is a retirement savings plan offered by a corporation to its employees. The plan allows eligible employees¹ known as plan participants, to contribute a portion of their annual income² to an account in their own name. Contributions reduce each participant's taxable income, and all earnings are tax-deferred until withdrawn.³

Some employers who offer 401(k) programs make matching contributions. A "matching" contribution is when an employer contributes a portion of each eligible participants' deferral amount to a separate account based on a pre-determined formula.

Employers can also combine a 401(k) plan with a profit-sharing plan. In a profit-sharing plan, all eligible employees receive a profit-sharing contribution from the employer, regardless of whether they contribute to the program. Some plans may require participants to contribute at some minimum level in order to qualify.

Profit-sharing contributions generally range from 0%-15% of an employee's salary. Employers can determine the percentage based on a number of factors, including the amount they would like to contribute or other employees are deferring, fees for plan maintenance, and the costs of employee funding.

¹ Usually those who have at least one year of service and work more than 1000 hours annually.
² Subject to applicable limits.
³ Withdrawal of earnings are taxed as ordinary income and may also be subject to a 10% federal income tax penalty if taken before age 59½.

Important Features of a 401(k) Plan for Corporations 

• Helps attract candidates for employment
• Helps retain valuable employees
• Is cost-effective compared to other qualified plans
• Has relatively modest set up and maintenance costs
• Allows corporations to deduct contributions made on their employees' behalf (including profit sharing, employee deferrals and matching contributions)

Important Features of a 401(k) Plan for Employees

• Is a relatively easy and painless way to save for retirement
• Allows eligible employees to reduce their current income tax liability

Which Companies Are Eligible to Establish 401(k) Plans?

Companies can establish a 401(k) plan regardless of their particular business structure. Recent law changes have even made it possible for many non-profit organizations to establish 401(k) plans. Companies can also establish 401(k) plans, regardless of the number of employees that they have.

Remember, the amount that certain highly compensated employees can contribute to a 401(k) plan generally depends on the amount contributed by other employees, b ased on non-discrimination test and guidelines set by the IRS.

AXA Advisors — Retirement Planning Services

Whether you are interested in establishing a 401(k), or would like to explore your options for an existing retirement plan, a knowledgeable financial professional from AXA Advisors can help you determine which arrangement makes the most sense for you and your business.