401(k) Salary Reduction (Retirement) Plan
A 401(k) is an employer-established retirement savings plan. When you enroll in a 401(k) plan you are allowed to contribute a portion of your wages into the plan before taxes. Your contributions grow tax deferred in funds that you choose. The benefit of making contributions to a 401(k) is that your contributions reduce your taxable income for the year, thereby reducing the amount you pay in taxes each year as well. In addition, an employer has the option to match employee contributions.
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Frequently Asked Questions
+ Who is eligibile to participate?
You may be eligible to participate in the 401(k) plan if (1) you are 21 years of age or older and (2) you have completed one year of service which is defined as a 12 month period starting from your date of hire in which you have been credited with a least 1000 hours of service.
+ What are salary deferrals and how to I contribute them to the plan?
As a participant under the plan, you may elect to reduce your compensation by a specific percentage and have that amount contributed to the plan on a pre-tax basis as a salary deferral. You taxable income is reduced by the deferral contribution so you pay less in federal income taxes.
+ What is "Employer Matching"?
The company may choose to make a matching contribution equal to a uniform percentage of your salary deferrals. Each year the company will determine the amount, if any, of the matching percentage.
That sounds technical so let's simplify it. Let's say you contribute $100 per week to the 401(k) and the company elects to match 50% for the year -- basically what that means is that you get ($100 x 0.50) or $50 per week added to your $100 per week as a contribution to your 401(k). There are limits and other conditions that are explained in the plan documents but you get the idea.
+ What is "Vesting"?
In order to reward employees who remain employed with the company for a long period of time the law permits a "vesting schedule" to be applied to certain contributions that the company makes to the plan.
All of the contributions you make to your 401(k) are "fully vested" which basically means your contributions are yours. However, if the company makes contributions to your 401(k) (such as in the Matching example above) and you leave the company or your employment is terminated, you will only be entitled to keep a percentage (from 0%-100%) of that contribution based on how many year you've worked here. The plan documents have this schedule posted. Currently it is...
- Less than 2 Years of Service - 0%
- 2 Years of Service - 20%
- 3 Years of Service - 40%
- 4 Years of Service - 60%
- 5 Years of Service - 80%
- 6 Years of Service - 100%
+ What happens to my 401(k) if I leave the company?
Should you leave the company for any reason, you can take your vested account balance with you. You can roll your money over into an IRA or your new employer's 401(k) program if they offer one. Both of these options have no penalties involved. However, if you decide to take a cash distribution before retirement age you may be subject to IRS penalties as well as having to pay income taxes on the money you withdraw.