401(k) Plans Key Terms
Contribute to your employees' retirement by learning about 401(k) plans
Learning about 401(k) plans key terms is a good place to start if you're considering starting up a retirement fund for your employees. From automatic enrollment to matching, after-tax and pre-tax contributions, 401(k) plans have several terms you may want to know before beginning one of these programs. Learning 401(k) plans key terms will also benefit your employees, who will want to know about terms such as rollover and cash-outs.
One of the greatest assets of 401(k) plans are matching contributions. Many companies will match employee contributions to a 401(k) plan, either dollar-for-dollar or a certain percentage. Many companies will match up to 3 percent, with some going as high as a 6 percent match.
While some companies require employees to submit paperwork in order to participate in 401(k) plans, others use an automatic enrollment system. An employee is automatically enrolled in a 401(k) plan by the employer, and how contributions are invested is decided by the plan design.
In 2006, the Roth 401(k) was introduced as another retirement option for employers to offer their employees. While still a retirement plan with employer-matching contributions, Roth 401(k) plans differ from traditional 401(k) plans in several ways, including contributions made with after-tax dollars and no taxes on withdrawals dependent on certain provisions.
In 401(k) plans, vesting refers to ownership of the plan's account balance. An employee is always fully, or 100 percent, vested as far as his or her own contributions are concerned, but how much he or she is vested in an employer's matching contribution differs from company to company. Many companies require that an employee work for a set number of years before being fully vested in the 401(k) plan.
A rollover allows an employee to move the balance of a 401(k) to another employer's plan or to his or her own retirement account should the employee transfer to another job. Tax benefits are retained during a rollover and no penalties apply.
A cash-out occurs when an employee takes out money from his or her 401(k) account before reaching retirement age or when he or she moves from one job to another without rolling over the 401(k) to a new plan. Cash-outs are subject to early-withdrawal penalties and federal withholding taxes.
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