401(k) Plan Contributions

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Contributions to a 401(k) plan can be made by employee deferrals, after employee tax contributions or employer contributions.

Employee Deferrals

Employee Contributions

Pre-Tax Contributions
Salary Deferrals or
Elective Deferrals

After-Tax Contributions
Roth Contributions

These contributions are referred to as 401(k) contributions, 401(k) deferrals, or elective deferrals. These are the pre-tax contributions that are made to the plan by participants through payroll deductions.Because they are contributed on a pre-tax basis, they are not subject to federal income tax withholding at the time of deferral, and they are not included in the participant’s taxable income for the year of the deferral. Instead, the 401(k) deferrals and earnings on those amounts are taxed at the time they are distributed to the participant.

In addition to regular 401(k) deferrals, a 401(k) plan may allow participants to elect to make designated Roth deferral contributions to the plan. These contributions are also made through payroll deductions and are subject to the same deposit rules; however, they are made on an after tax basis, which means that they are included in gross income and taxed at the time they are contributed.

In general, plans must limit deferral contributions (including 401(k) deferrals and designated Roth deferrals) to the amount in effect under the Internal Revenue Code for that particular year. For more information regarding the annual deferral limits and the requirement to return deferrals which exceed those limits, click here.

The deposit requirements for 401(k) deferrals are strictly enforced by the Department of Labor. Following each payroll cycle, employers must segregate all 401(k) deferrals from their general assets as soon as administratively possible and get them deposited into the plan’s trust immediately thereafter.

Employer Contributions

A 401(k) plan may also provide for one or more types of employer contributions to the plan, such as employer matching contributions or discretionary employer contributions. Employer matching contributions are received only by participants who choose to make deferral contributions to the plan. Discretionary employer contributions (sometimes called non-elective contributions) can be a set amount or can be decided each year, and they are typically based on a percentage of each eligible participant’s compensation for the plan year.

Participants may elect to make 401(k) deferral contributions to the plan by completing a payroll deduction request in accordance with the timing and procedural requirements included in the plan. Typically, the plan allows the participant to elect to contribute a specified percentage of their compensation or a specified dollar amount each payroll period, and these contributions are made to the plan on a pre-tax basis.