It could be to your benefit to take advantage of salary deferral retirement plans offered under 401(k) of the Internal Revenue Code (IRC). This fringe benefit allows employees and company officers to designate a portion of their compensation as a contribution to a 401(k) plan instead of having it paid to them
in cash. In addition, many corporations that maintain 401(k) plans, partially match the amounts set aside by the employee. The 401(k) plan contributions and the interest earned are not taxed until withdrawal.
Like other retirement plans, 401(k) plans are subject to very complex anti-discrimination rules, which basically provide that the tax-favored amounts put into the plan on behalf of highly compensated employees (HCEs) cannot be grossly disproportionate to the amounts set aside on behalf of lower paid employees. Many companies have cut back on the 401(k) contributions of HCEs because lower paid employees have not participated enough. The Internal Revenue Service (IRS) has liberalized its rules in a way that may mitigate the problem.
In the past, all employees covered by a single plan were required to be considered in the same group for purposes of 401(k) anti-discrimination testing. The rule change now permits employees to be classified in two or more groups for this purpose if certain conditions and nondiscrimination tests are met. For example, a company may treat its salaried workers as one group and its hourly wage workers as another, or its employees in California as one group and those in New York as another. It is important to note, however, that top Treasury officials have expressed concern that the new rules are too liberal and may be reconsidered.
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