Cash Or Deferred - Sec. 401 (k) Plan

The Basics: Any profit sharing or stock bonus plan which meets certain participation requirements of IRC Sec. 401(k) can be a cash or deferred plan. An employee can agree to a salary reduction or to defer a bonus which he or she has coming. Tax exempt entities may also adopt a 401(k) plan.

How It Works

1. Employee has the option of taking cash or having it paid to the trust for retirement. This is equivalent to an employee tax deductible contribution. However, employee deferrals are subject to FICA and FUTA.
2. Any additional employer contributions are tax deductible, and not taxable to the participant.
3. With the exception of social security and unemployment taxes, employer contributions, if any, are not taxed currently to the employee.
4. Earnings accumulate income tax-deferred.
5. Distributions are generally taxed as ordinary income..

Two Types Of Plans

1. Salary Reduction: An employee can agree to a salary reduction; e.g.,10% of compensation, which the employer then pays to the retirement plan trust. It is deductible to the employer but is not included in the employee's gross income. In 2008 a particpant can reduce up $15,500 of his/her salary ($20,500 if age 50+).
   
2. Cash Or Deferred: The employer can decide to pay a bonus and give the employees the following choices:
   
   1. Take it as cash.
   2. Defer it to the trust.
   3. Take part and defer the rest.

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