Client: 401khoax.com
Article Number Title: 1b
“401k laws”

401k Laws began, in effect, in 1978 when Congress amended the Internal Revenue Code by adding section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The 401k law went into effect on January 1, 1980, and by 1983 almost half of large firms were either offering a 401(k) plan or considering doing so.

Today, 401(k) plans are the target of many individuals interested in exploring new avenues of making money. For people with that interest, however, misusing their 401(k) can be disastrous. That is why it is absolutely essential to understand 401k laws. To stress that point, we will continue looking at the history of these laws in the United States. It was not long after the addition of Section 401(k) to the Internal Revenue Code that new regulations had to be enforced to prevent abuse of the 401k laws.

By 1984 there were 17,303 companies offering 401(k) plans. Also in 1984, Congress passed legislation requiring nondiscrimination testing, to make sure that the plans did not discriminate in favor of highly paid employees by permitting them to set aside more than a certain allowable amount. In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute. By 2003, there were 438,000 companies with 401(k) plans.

A primary reason for the explosion of 401(k) plans is that such plans are cheaper for employers to maintain than a defined benefit pension for every retired worker. With a 401(k) plan, instead of required pension contributions, the employer only has to pay plan administration and support costs if they elect not to match employee contributions or make profit sharing contributions. In addition, some or all of the plan administration costs can be passed on to plan participants. In years with strong profits, employers can make matching or profit-sharing contributions, and reduce or eliminate them in poor years. Thus 401(k) plans create a predictable cost for employers, while the cost of defined benefit plans can vary unpredictably from year to year.

There are contributions regulations as well with the 401k laws. There are limits; as of 2009 it was $16,500. For future years, the limit may be indexed for inflation, increasing in increments of $500. Employees who are 50 years old or over at any time during the year are now allowed additional pre-tax catch up contributions of up to $5,000 for 2008 and $5,500 for 2009. The limit for future catch up contributions may also be adjusted for inflation in increments of $500. The total of all 401(k) contributions must not exceed the maximum contribution amount.

Another 401k law is Required Minimum Distributions. An account owner must begin making distributions no later than the year after the year he or she turns 70½. The only exception is if the account owner is still employed at the sponsoring company. The amount of distributions is based on life expectancy (see appropriate IRS tables).