401(k) Plan Contribution RequirementsA 401(k) plan has certain requirements. The plan must be part of a qualified stock bonus plan or profit-sharing plan. (A grandfather clause allows a pre-1974 money purchase pension plan to include 401(k) provisions.) The Employee Retirement Income Security Act was passed in 1974 and altered many rules on pension plans.
All 401(k) contributions (employer and employee) are deductible by the employer.Eligibility requirements can be set for minimum age and service (for example, employees 21 and older with 1,000 hours of service).
Total contributions (employee and employer) are limited to the lesser of 100 percent of the employee’s compensation or $49,000 in 2009 and 2010. Employer contributions are not required, however, so employers have flexibility in matching their employees’ contributions.
- The employee contribution limit was increased by the Tax Relief Act of 2001. The maximum employee contribution is $16,500 for 2009 and 2010. A "catch-up" provision of the law allows taxpayers over age 50 to contribute an additional $5,500.
- As long as all employees are covered by the plan, there is no minimum number of employees needed for a plan to exist. (Employees covered by a collective bargaining agreement may be excluded.)
- Employees are always 100 percent vested (meaning they have the right to take their accumulated pension money out of the fund) in their elective deferrals. Vesting of non-elective (employer) contributions is subject to a schedule depending on the terms of the plan.
- All 401(k) contributions (employer and employee) are deductible by the employer.
401(K) plans are very flexible, but they must meet IRS requirements to qualify for special tax treatment. These requirements include contribution limits as well as requirements as to how the plan is established and who may participate.