The Employee Benefits Security Administration of the U.S. Department of Labor is the federal agency that enforces pension plan regulations. The Internal Revenue Service oversees federal tax laws associated with pension plans. The federal policies that apply to 401(k)s vary by plan.
You fund a traditional 401(k) with pretax money. Your employer does not take federal income tax out of your contributions, but it must withhold Medicare and Social Security taxes. If you were younger than 50 in 2013, you could sock away up to $17,500 or 100 percent of your salary, whichever was less. If you were 50 or older, your annual limit was $23,000. If your employer matched your contributions, the yearly limit was $51,000 including both your and your employer’s amounts. If you are a "highly compensated employee" as defined by the IRS, you may put up to $115,000 in your traditional 401(k). When you withdraw your money from the plan, you must pay federal income tax on your contributions and earnings.
In 2013, you were a highly compensated employee if you owned at least 5 percent of the company in that year or 2012 and earned at least $115,000 in 2012. Your annual compensation must have placed you among the 20 employees who earned the most during the year.
You fund a Roth 401(k) with after-tax money. When your employer deducts your contributions from your salary, it withholds federal income tax as well as Medicare and Social Security taxes. The same annual contribution limits that apply to a traditional 401(k) go for a Roth 401(k). Though you may contribute to a traditional 401(k) and Roth 401(k) simultaneously, your combined savings aren't allowed to exceed the yearly limit. Your employer’s contributions are made with pretax money that goes into a separate account from your contributions, and this employer match is taxable upon withdrawal. However, your own contributions and earnings aren't taxed upon withdrawal.
An employer with 100 or fewer employees who were paid at least $5,000 in wages in the past year may establish a SIMPLE 401(k) plan. As of 2013, you could stash up to $11,500 in your SIMPLE 401(k) if you were younger than 50. If you were 50 or older, you could contribute an extra $2,500. Your employer must match your contributions on a dollar-for-dollar basis, up to 3 percent of your compensation, or it must make non-elective contributions of up to 2 percent of your pay.
To offer 401(k) plans, your employer must satisfy several requirements of the U.S. Department of Labor and the IRS. This includes establishing a written plan, arranging a trust fund to hold plan assets, establishing a record-keeping system, and giving eligible participants information about the plan. The plan might need annual nondiscrimination testing to ensure that it doesn't unfairly favor highly compensated employees. Each year the employer must file Form 5500, which the Department of Labor and the IRS use to determine whether the employer is complying with 401(k) standards.
If you no longer work for your employer, you may withdraw your money or roll it over into an individual retirement account. You might leave the money in your employer’s plan or directly roll it over into your new employer’s plan, if you have those options. A 10 percent penalty, in addition to normal income tax, might be charged if you withdraw your money before age 59 1/2.
- U.S. Department of Labor: Frequently Asked Questions about Pension Plans and ERISA
- Society for Human Resource Management: For 2013, IRS Raises 401(k) and Pension Plan Limits
- Society for Human Resource Management: Clearing Annual 401(k) Compliance Test Hurdles
- Cornell University Law School: 26 CFR 1.401(k)-4 -- SIMPLE 401(k) Plan Requirements
- IRS.gov: Choosing a Retirement Plan: SIMPLE 401(k) Plan
- U.S. Department of Labor: 401(k) Plans For Small Businesses
- U.S. Department of Labor: Form 5500 Series
- Ameriprise Financial: Deciding What to Do With Your 401(k) Plan When You Change Jobs
- Ameriprise Financial: Required Minimum Distributions (RMDs)
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.