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There
are several types of contributions all of which grow tax deferred
until the employees begin taking distributions from their account.
- Salary-Deferred
Contributions –
Employees contribute a portion of their salary to the 401(k) plan
before taxes are deducted. This money would otherwise be included
in their paycheck. The entire amount deferred from their paycheck
will always belong to the employees (100% vested).
- Rollover Deposits
– Depending
on your plan's design, a rollover contribution from another company's
plan may be accepted. This entire amount would belong to the employees
(100% vested).
- Matching Contributions
– As
an employer you can opt to make contributions to the plan. The
amount of money provided to a participant depends on the amount
of the employee's salary-deferred contribution and the match formula
for the plan. The match formula states the percentage of employee
deferral contributions you will match with company contributed
dollars.
- Discretionary Contributions
– The
employer also has an option to contribute additional amounts to
the plan based on the profitability of the company. This method
provides incentives and rewards, builds company loyalty and allows
growing companies to increase or decrease contributions based
on their ability.
Vesting
Employee contributions belong to participants from the time they
are put into the plan. These funds are "100% vested."
Matching contributions strengthen a plan and its total benefit to
a company and encourage employees to participate in the 401(k) plan.
However, stricter vesting rules may be applied to employer contributions
and matching money.
Employees have to remain with the company a certain
length of time before the matching money and any earnings are a
permanent part of their retirement savings. An employee who leaves
before this vesting period has been completed may lose a substantial
part of their overall 401(k) funds.
A 401(k) is flexible in that it allows
the employer to decide how long an employee must work to own their
employer contributions.
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