FAQ - What is a 401(k) Plan?
Q. Â I am new to HR and I am
unfamiliar with what a 401(k) plan is. Â
Can you provide me with some general information?
A. Â A 401(k) plan is a tax-deferred investment and
savings plan that acts as a personal pension fund for employees. It allows
employees of corporations and private companies to save and invest for their
own retirement. In a 401(k) plan, you authorize pre-tax payroll deductions to
be invested in mutual funds or other investment options offered by your
company''s plan. Both the contributions and the investment earnings can grow
tax-deferred until withdrawal (assumed to be retirement), at which time they
are taxed as ordinary income. It is usually calculated by a formula that takes
into account the salary level and length of service of the employee.
401(k)
plans were established by the US federal government in 1981 to encourage
workers to establish retirement savings. The name refers to the relevant
section in the Internal Revenue Code. 401(k) plans are generally limited to
large, established companies. It is advantageous for the employer to implement
such a plan because it has relatively low administrative costs and it benefits
the employee to in that 401(k) plans are usually highly portable, which means
that the employee can take most or all funds with them if they change jobs. The
disadvantage to these types of plans is that they offer no guaranteed payouts,
as they may be investment risks for employers. Â
Also, employees who withdraw their contributions prematurely can be
faced with heavy tax penalties. Â
You can
find more information by conducting a keyword search on HR.COM, using the
keywords 401.