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Definitions of Terms

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For Small Business Owners and Executives

If you are an owner of a business with few employees and are looking to compensate just a few key employees or just yourself, you may want to consider a New Comparability Profit-Sharing Plan.

A New Comparability Profit-Sharing Plan allows for the largest possible share of the company"s contribution to be allocated to the owner and/or key employees by allowing contributions to be allocated according to employee classification groups.

401K Plans

traditional-401k-plan Traditional 401K Plans
    vesting Vesting
    nondiscrimination testing Nondiscrimination Testing
safe-harbor-401k-plan Safe Harbor 401K Plans
SIMPLE-401k-plan SIMPLE 401K Plans
Automatic-401k-plan Automatic 401K Plans

401K Plans are Qualified Employer Sponsored Retirement Plans whereby the employer contributes a set percentage of the employee"s salary either through salary deferral or at the employer"s expense to the account set up for each participating employee. The written plan must provide that each participant receive all benefits by April 1st of the calendar year that the participant retires or by April 1st of the calendar year after the participant turns 70 1/2.


Traditional 401(k) Plan

If the company decides to contribute to the 401(k) plan it can contribute a percentage of each employee"s compensation to the participant"s account (called a nonelective contribution), or it can match the amount the employee decides to contribute (within the limits of current law) or it can do both.

Other features of the plan are:

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Vesting refers to ownership. If an employee is 100 percent vested in his account he owns all benefits in the account and the employer may not take it back even if the employee is terminated. Often an employer may, depending on the type of plan, apply a vesting schedule such that an increasing percent of the employer"s contributions are vested each year until the employee owns 100 percent of the account.

Nondiscrimination Testing

For a 401(k) plan to qualify for tax benefits the plan must provide benefits for rank-and-file employees, not just business owners and managers. These requirements are called nondiscrimination rules and compare plan participation and contributions of rank-and-file employees to owners/managers.

Safe Harbor 401(k) Plan

Under a Safe Harbor plan the company can match each eligible employee"s contribution, up to 3 percent of the employee"s compensation, and 50 cents on the dollar for the employee"s contribution that exceeds 3 percent, but not 5 percent, of the employee"s compensation or it can make a nonelective contribution equal to 3 percent of compensation to each eligible employee"s account, but it must make either the matching contributions or the nonelective contributions. In addition:

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SIMPLE 401(k) Plan

Employer contributions to a SIMPLE 401(k) plan are limited to either a dollar-for-dollar matching contribution, up to 3 percent of pay or a nonelective contribution of 2 percent of pay for each eligible employee. Also

Automatic 401(k) Plan

A 401(k) plan that includes an automatic enrollment feature which permits the employer to automatically reduce the employee’s wages by a fixed percentage or amount and contribute that amount to the 401(k) plan unless the employee has affirmatively chosen not to have his salary reduced. Also:

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