There are certain rules that govern the operation of a 401(k) plan. Rules and regulations for 401(k) plans are established by the US tax advertisement code. The Employee Benefits Security Administration of the U.S. Department of Labor regulates the operation of these plans One of the rules put a certain dollar limit on the amount an employee may decide upon to defer each year. There are certain other limits also that may apply to the amount that an employer may have to contribute on your behalf. The employers, if they desire, can make a matching contribution to a 401k plan. But it is not mandatory for them to make any contribution. The money deposited in an individual employee's 401K plan is generally not allowed to be withdrawn till retirement. Though it is a retirement plan but in certain circumstances an employee may be allowed to utilize some of the funds collected under this plan. Every individual has a separate 401k plan account. Before final withdrawal, an employee does not pay any taxes on this fund. When at the time of retirement one withdraws the money from this account, then that amount is taxed as an ordinary income. Under the rules and regulations governing this law, if low compensated employees do not contribute enough by the end of the plan year, then the limit is changed for highly compensated employees. These and some other provisions ensure that the employers are encouraged to make this option not only to the highly compensated but other employees also. There have been certain changes in rules and regulations that govern execution of 401K plans. The maximum before tax contribution limit is also changed from time to time. This limit is also subject to the catch up provision that is available to employees who are more than 50 years old. |
