401(k) Plans

Plans with a 401(k) provision allow a participant to contribute or “defer” a portion of his or her own compensation to the plan for investment.

Deferrals are limited to $23,000 annually and participants who are age 50 or older may defer an additional $7,500 (limits for 2024).

Generally, 401(k) deferrals are not subject to income tax until the deferrals (and investment earnings) are distributed to participants.

Some 401(k) plans allow participants to make after-tax deferrals known as Roth 401(k) deferrals. A Roth 401(k) deferral and the investment earnings on the contribution are not subject to income tax upon distribution.

A cross-tested 401(k) safe harbor profit sharing plan is a defined contribution plan with three (or more) types of contributions, including a special safe harbor profit sharing or matching contribution. This type of plan may allow the amount of contribution to vary for each participant. While nondiscrimination testing is required, the plan gets an automatic pass for the 401(k) deferral (ADP) test if the plan meets the requirements to be a 401(k) safe harbor plan for a given plan year.

There are several safe harbor contribution options to chose from when setting up this type of 401(k) plan. The plan sponsor may elect, year-by-year, to make the special safe harbor contribution. Advance participant notice is required each year that the plan sponsor elects to “activate” the safe harbor contribution.

Contact us today if you are interested in setting up a defined contribution plan with a 401(k) feature, or if you’d like to add a 401(k) feature to your existing profit sharing plan.