401(k) Plan Spotlight
CNN senior writer Jeanne Sahadi describes increased limits, automatic enrollment (encouraged but not mandated) and greater flexibility with respect to selling company stock held in a 401(k) plan as only a few of the many elements of the Pension Protection Act of 2006 that bode well for the future of what the IRS describes as "the most popular type of retirement plan used today." (The Act still requires the President's sign-off.)
By way of background, a "401(k)" plan takes its name from a section of the Internal Revenue Code. According to the 401(k) Resource Guide, created and made available by the IRS:
A 401(k) plan is a qualified (i.e., meets the standards set forth in the Internal Revenue Code (IRC) for tax-favored status) profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan under which an employee can elect to have the employer contribute a portion of the employee's cash wages to the plan on a pre-tax basis. These deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee's Form 1040, U.S. Individual Income Tax Return.
Since this blog deals with pension risk, it is worth mentioning that defined contribution programs such as 401(k) plans are not a risk-free alternative for employers. See Myth #4 of this author's article entitled "Pension Risk Management: Necessary and Desirable".
By way of background, a "401(k)" plan takes its name from a section of the Internal Revenue Code. According to the 401(k) Resource Guide, created and made available by the IRS:
A 401(k) plan is a qualified (i.e., meets the standards set forth in the Internal Revenue Code (IRC) for tax-favored status) profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan under which an employee can elect to have the employer contribute a portion of the employee's cash wages to the plan on a pre-tax basis. These deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee's Form 1040, U.S. Individual Income Tax Return.
Since this blog deals with pension risk, it is worth mentioning that defined contribution programs such as 401(k) plans are not a risk-free alternative for employers. See Myth #4 of this author's article entitled "Pension Risk Management: Necessary and Desirable".
