408 (k) plan also called as Salary Reduction Simplified Employee Pension Plan. The plan is available to companies that run with below 25 employees. The scheme allows the employees to make contributions in order to reduce the current year’s net income. In other wards, 408k plan is similar to 401k plan but it is designed to meet the needs of smaller companies who desire to provide retirement benefit to their employees. As the 401k retirement plan is attractable and many profit corporations consider offering such retirement plan. Typically, the smaller companies cannot offer such large scale retirement plan and hence 408k is preferable for such smaller companies.
The 408k plan also available to self-employed persons. The costs of contributions made by self-employed are eligible for deductions up to specific amount. In case of employees, they will be eligible for 408k if such employee employed by the company for three of last five years and should have made contribution at least $550 in the year of contribution begun. Annual contributions are limited to $16,500 up to the age of 50 of the employee. The qualified employees should the Form 1099-R
408 (k) plan described under the Internal Revenue Code as 408 (k). Under this code, the employees are allowed to contribute by using their pre-tax dollars. Both employee and employer contribute to the account. However the amount held with the name of the employee. The so contributed amount is not taxable until withdrawal. It means tax is levied at the time of withdrawal. Typically the employer maintains accounts of 408 (k) plan and the employee will be considered as owner of the account.
When the employer proposes to introduce the 408 (k), a notice to all employees should be given by employer indicating rules and regulations of plan. Besides the proposed plan must be set up by December 30 prior to the year in which the contributions proposed to be deducted. The Section of 408 (k) defines the qualification rules for trusts and plans. The plan also known as Simplified Employee Pension or SEP.
When the employee reaches to age of 59 ½, the funds in account treated as regular income and consequently liable to tax. The penalty of 10% also imposed where any early withdrawal from such 408 (k) plans. The plan of 408 (k) is simple version of 401 (k) retirement plan. In order to protect the employees of smaller organizations, the scheme of 408k is introduced as social security measure.