USA’s 401(k) and similar retirement plans
Gretchen Inouye CPP, payroll consultant, outlines various plans and rules
I n the USA, retirement plans come in a variety of sizes, provisions, and complexity with some common general characteristics. All retirement plans are a form of deferred compensation because employees are working now for compensation they will receive in the future, and there are tax implications. Internal Revenue Code section 401 addresses pension and profit-sharing plans, and subsection 401(k) covers the type called cash or deferred arrangements (CODA), which are known as 401(k) plans. These 401(k) plans and similar arrangements can be considered ‘qualified’ plans, which are entitled to some favourable tax treatment, if they meet certain general conditions including: ● a written plan communicated to the employees ● the plan is only for employees, which may include retirees and beneficiaries ● the plan does not discriminate in favour of highly compensated individuals as defined by the Inland Revenue Service (IRS) ● it is nontransferable and nonforfeitable (vested) ● the operation of the plan must satisfy the rules of the plan document and IRS regulations. Standard 401(k) plans allow employees to make elective deferrals of their compensation into an account under the plan. These employee contributions are not subject to federal income tax withholding at the time of deferral. They are subject to social security, Medicare, and FUTA (Federal Unemployment Tax Act) taxes. Income tax may be due from the employee when distributions are taken or received. The employee contributions are vested immediately.
Employers may make nontaxable contributions to the plan but are not required to do so. Employer contributions may be a partial or full match of the employee’s portion or may use another formula. The employer portion may not vest immediately.
in favour of HCEs so are actually treated as nonqualified plans for some purposes. Roth plans can be established as an alternative to standard 401(k), 403(b), and 457(b) plans to allow employee contributions that are not pre-tax for federal income tax withholding. In these plans, taxes are withheld on deferral and not on distribution. o This article was published in the February 2018 issue of the American Payroll Association’s PayTech magazine. The APA, www.americanpayroll.org, is the USA’s leader in payroll education, publications, and training. This nonprofit association conducts more than 300 payroll training conferences and seminars across the country each year and publishes a complete library of resource texts and newsletters. Representing more than 21,000 members, APA is the industry’s highly respected and collective voice in Washington, D.C. The Global Payroll Management Institute (GPMI), www.GPMInstitute.com, spearheads the APA’s global initiatives to provide the world with a leading community of payroll leaders, managers, practitioners, researchers, and technology experts. Subscribers connect with each other through networking discussions, collaborative opportunities, and access to education and publications dedicated to global payroll strategies, knowledge, research, employment, and training. GPMI also publishes several global payroll texts and white papers as a benefit to subscribers. Gretchen Inouye CPP, is the APA’s 2015 Payroll Woman of the Year.
...favourable tax treatment, if they meet certain general conditions...
Nondiscrimination testing must be conducted annually to ensure that the plan does not discriminate in favor of highly compensated employees (HCE). Employers must remit the employee contributions to the administrator or trustee on a timely basis, which is generally as soon as those amounts can be identified. Standard 403(b) plans are tax-sheltered annuities (TSAs) or tax-sheltered custodial accounts (TSCAs) that are programmes for employees of tax-exempt organisations such as educational institutions, religious groups, and public charities. The limits and tax treatments of 403(b) contributions and deferrals are the same as 401(k) plans. If an individual has participated in a 401(k) plan and 403(b) plan in the same year, those contributions must be combined for purposes of determining if the limits have been exceeded. The 457(b) plans are for employees of states, localities, counties, or other government districts as well as certain exempt organisations. The limits and tax treatments are the same as 401(k) and 403(b) plans, but 457(b) plans, however, may discriminate
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Issue 44 | October 2018
| Professional in Payroll, Pensions and Reward |
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