![]() ![]() If a plan satisfies these requirements, plan contributions made by the employer may be currently deductible and these contributions ordinarily won't be included in employees' gross income until distributed from the plan. Additionally, elective deferrals are always 100% vested, or fully owned by the employee.Ī 401(k) plan is a "qualified plan" - one that satisfies the requirements listed under Internal Revenue Code Section 401(a). Jan will only include $22,000 as income on that year's tax return.Īlthough the law doesn't treat amounts deferred as current income for federal income tax purposes, they are included as wages subject to Social Security (FICA), Medicare and federal unemployment taxes (FUTA). Individual Income Tax Return.Įxample: Jan earns $25,000 in a year and elects to defer $3,000 on a pre-tax basis into a 401(k) plan. ![]() A 401(k) plan may also include other types of employer and employee contributions.Įlective deferrals (other than designated Roth contributions) aren't subject to federal income tax withholding at the time of deferral and they aren't reflected as income on the employee's Form 1040, U.S. A 401(k) plan is also referred to as a cash or deferred arrangement, or CODA. Generally, Internal Revenue Code (IRC) Section 401(k) permits an employee to elect to have the employer contribute a portion of the employee's wages to a 401(k) plan on a pre-tax basis (these employee contributions are known as elective deferrals, salary deferrals or salary reduction contributions).
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