A section 401(k) plan is a type of tax-qualified deferred compensation
plan in which an employee can elect to have the employer contribute a portion
of his or her cash wages to the plan on a pre–tax basis. These deferred
wages (commonly referred to as elective deferrals) are not subject to income
tax withholding at the time of deferral, and they are not reflected on your Form 1040(PDF) since they were not included in the taxable
wages on your Form W-2(PDF). However, they are included
as wages subject to social security, Medicare, and federal unemployment taxes.
The amount that an employee may elect to defer to a 401(k) plan is limited.
During 2004, an employee cannot elect to defer more than $13,000 for all 401(k)
plans in which the employee participates. But if the employee participates
in a SIMPLE 401(k) plan, the limit for 2004 is $9,000. Both of these limits
are indexed for inflation. In addition, if the 401(k) plan permits participants
age 50 or over may be eligible to make additional "catch-up contributions"
to the plan of up to $3,000 in 2004 ($1,500 for SIMPLE 401(k) plans) under
section 414(v). Generally, all deferred compensation plans (such as a 401(k)
plan and 403(b) plan) in which the employee participates must be considered
to determine if the $13,000 limit is exceeded. All contributions to retirement
plans (including deferred compensation plans) are subject to additional limits.
Therefore, your elective contributions may be limited based on the terms of
your 401(k) plan. Refer to Publication 525, Taxable and Nontaxable
Income, for more information about elective deferrals. Employers should
refer to Publication 560, Retirement Plans for Small Business,
for information about setting up and maintaining retirement plans for employees,
including 401(k) plans.
Distributions from a 401(k) plan may qualify for optional lump–sum
distribution treatment or rollover treatment as long as they meet the respective
requirements. For more information, refer to Topic 412, Lump–Sum
Distributions, Topic 413, Rollovers from Retirement Plans,
and Topic 555, 10–Year Tax Option for Lump–Sum Distributions.
Many 401(k) plans allow employees to make a hardship withdrawal because
of immediate and heavy financial needs. Generally, hardship distributions
from a 401(k) plan are limited to the amount of the employee's elective deferrals
only, and do not include any income earned on the deferred amounts. Hardship
distributions are not treated as eligible rollover distributions.
Distributions received before age 59 1/2 are subject to an early distribution
penalty of 10% additional tax unless an exception applies. For more information
about the treatment of retirement plan distributions, refer to Publication 575, Pension
and Annuity Income.