What are basic 401(k) plan rules?


Quick Answer

Among the Internal Revenue Service rules about 401(k) plans include that the maximum allowable contribution for 2015 is $18,000 and distributions before the participant reaches the age of 59 1/2 are subject to an additional 10 percent penalty. Other rules include that certain distributions before the participant reaches the age of 59 1/2 are exempt from penalty and that it becomes mandatory for participants to receive distributions once they reach the age of 70 1/2 notes the Internal Revenue Service (IRS).

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Full Answer

There are two major categories of 401(k) plans and these are defined benefits (DB) and defined contribution (DC). There are certain eligibility requirements that an employee should meet to qualify for the DB plan. In this type of plan, the employer commits to pay his retired employee monthly benefits for the rest of his life. The DC on the other hand, sets the contributions that the employer makes to the employee's 401(k) plan, states the 401(k) Help Center website.

Employers can likewise restrict employees from being eligible to the plan on the basis of length of service, being part-time workers, being union members and being non-United States citizens. As for the $18,000 maximum contribution limit for 2015, participants over the age of 50 can make "catch up" contributions of not more than $6,000 for the tax year. Other 401(k) rules are available on the official IRS website.

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