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401(k) Rules and Regulations

ContributionsEmployee maximum $19,000
Catch – up contribution of $6,000 for those 50 and older
Total contribution (employee and employer) is lesser of 100% of employee compensation OR $56,000
Contributions are tax-deductible to the employer
Growth within the account is tax-deferred
WithdrawalsTaxed upon withdrawal at ordinary income tax bracket
Withdrawals before 59 ½ assessed a 10% penalty unless exceptions applyMedical expenses that add up to more than 10% of your adjusted gross income
If you lose your job and collect unemployment for 12 consecutive weeks, can use retirement savings to pay health insurance
College costs
First home purchase ($ 10,000-lifetime max)
Military – active duty for more than 179 days
Death distribution
At least 55 years of age and separate from the employer
IRS tax levy
Loans are allowed (can vary by plan)50% of vested balance up to $50,000
Payback within 5 years
Payback within 2 months if you leave the employer
Distributions are required when you hit the age of 70 ½Calculated annually based on our life expectancy
RulesVesting schedule – employer contributions may not be available in totality right away
Costs range from 2% to 3% per year (percent of assets under management)
Employees are eligible if they are at least 21 years of age and have 1 year of serviceEligibility requirements can vary by plan
Set upAdopt a written plan
Arrange a trust to retain the plan assets
Set up a record keeping system
Provide information to the participants
File Form 5500 for large plans (more than 100 participants)
File Form 5500-SF for small plans (100 or fewer participants)

Solo 401(k)

Same rules as 401(k) except Solo 401(k) is only available to a self-employed individual OR if your only employee is your spouse
File Form 5500-EZ

Roth 401(k)

Most of the rules are the same
Things that are different
No Distributions required at 70 ½
Contributions are post-tax
Tax-free withdrawals after 59 ½

Simple 401(k)

ContributionsMax contribution of $12,500 per employee
Catch-up contribution of $3,000 for those 50 or older
The employer contribution is either…100% match up to 3% of employees salary OR
2% non-elective contribution (doesn’t matter if an employee contributes or not)
WithdrawalsWithdrawal rules are the same as a regular 401(k)
Other rulesOnly eligible to businesses with 100 or fewer employees
The plan must be established between January 1 and October 1. Unless the business is formed after October 1.
Employees who are 21 years or older and have completed one year of service are eligible.
Contributions are 100% vested right away
File Form 5500-SF

Safe Harbor 401(k)

Most rules are the same as the standard 401(k)
Key characteristicsAutomatically pass nondiscrimination testsADP test – takes into account pre-tax deferrals and after-tax Roth deferrals. To past test, the Actual deferral percentage (ADP) of highly-compensated employees (HCE) must not be more than 2% higher than ADP of Non-HCE. Additionally, the combined contributions of HCE must not be more than 2 times more than the combined contributions of Non-HCE.
ACP test – Same test, but also takes into account matching contributions from employers and catch-up contributions
Top-heavy test – Group together the total account value of your key employees and compare that to the total account value of the plan. If your key employees make up more than 60% of the plan value, then you are top heavy.
The employer must make the same percentage of salary contribution to every employee
Employer contribution optionsEmployer matches 100% of the first 3% and 50% of the next 2%
Employer matches 100% of the first 4%
Employer contributes 3% to all eligible employees (whether the employee contributes or not)
Employee contribution is lesser of…100% of employee income OR
$55,000 - $61,000 (high number includes catch-up contribution)