Employers can offer retirement plans where employees choose to deduct payroll funds for deposit into a 401(k) plan, according to the Internal Revenue Service. Deposits and distributions are subject to regulations that differ depending on the type of 401(k) plan and individual employee circumstances.Continue Reading
Employees make elective payroll deposits into 401(k) plans, and employers may also make deposits and match employee contributions, explains the IRS. Withdrawals of 401(k) funds are possible when the employee reaches age 59 1/2, experiences significant financial hardship or undergoes special circumstances. Early distributions before age 59 1/2 can incur substantial penalties from the IRS in the form of a higher tax rate in addition to the impact of income taxes. If an early distribution occurs due to employment changes, plan participants may avoid penalties by rolling the account balance into a new retirement plan.
Employers may choose to offer different 401(k) plans and be subject to differing requirements for how funds are vested and how employer contributions are made, reports the IRS. Many plans are immediately 100 percent vested and give employees the right to all funds whenever they are deposited. Some plans require employers to perform annual tests on how contributions are made to ensure compliance with IRS policies.Learn more about Financial Planning