the arnold group 401(k) plan

A 401(k) plan is an employer-sponsored retirement savings plan that allows an employee to contribute a portion of his or her paycheck into a tax-advantaged investment account. The employee (or plan participant) typically chooses from a range of investment options within the 401(k) plan. These options, which often include mutual funds, are chosen by the plan sponsor—usually the employer. Approximately half of all assets in 401(k) plans are invested in mutual funds, which in turn are invested in stocks, bonds, and short-term investments.

Generally, two types of contributions can be made to a 401(k) plan: pretax and Roth. Roth contributions have only been allowed starting in 2006, and the 401(k) plan sponsor decides whether to add the feature to the plan. In a pretax (or traditional) 401(k) plan account, taxes are deferred on an employee’s contributions; that is, the contribution is taken out of an employee’s paycheck before taxes and is only taxed when it is withdrawn from the 401(k) plan account, usually during retirement. Because contributions are tax-deferred, they lower an employee’s taxable income in the year of the contribution. For example, if an employee contributes $3,000 to a 401(k) plan in any given year, the employee is taxed on his or her income for that year minus $3,000, because the employer took out the $3,000 before taxes. Investment returns in a traditional 401(k) plan account, such as dividends or interest, are not taxed as they are reinvested in the account. When the retirement investors take withdrawals from the account, the amounts withdrawn are included in taxable income. Early withdrawals—before age 59½—generally also are subject to a 10 percent tax penalty.

For a Roth 401(k) plan account, the tax treatment is different. The employee’s contribution to a Roth 401(k) plan account is counted as taxable income in the year the contribution is made. Contributions and investment returns are then withdrawn tax-free in retirement, as long as the participant is 59½ years old and has had the Roth 401(k) plan for at least five years. Withdrawals of investment returns not meeting these criteria are subject to income tax and possibly a 10 percent tax penalty.

The 401(k) plan gets its name from the section number and subsection in the Internal Revenue Code—Section 401, subsection (k)—that permit deferral of compensation at the employee’s election.

Established by the Revenue Act of 1978, legislators wrote Section 401(k) to address a narrow tax issue that pitted the Internal Revenue Service (IRS) against employers who wanted to offer “cash or deferred arrangements” in tax-favored profit-sharing plans. Section 401(k) permitted employees to put a portion of their compensation into the plan and pay taxes on it later, rather than taking all of their compensation immediately and paying taxes upon receipt.

Although Congress passed Section 401(k) in 1978, it was not until November 10, 1981, that the IRS formally described the rules for 401(k) plans. In the years immediately following the issuance of those rules, large employers typically offered 401(k) plans as supplements to their defined benefit (DB) retirement plans (commonly known as traditional pensions), with few employers offering them to employees as stand-alone retirement options. Now 401(k) plans are the most common and one of the most successful employer-sponsored retirement plans available to workers today.

401(k) plans are one of the most popular and successful retirement saving tools. They offer several benefits:

• Tax planning. A traditional 401(k) plan reduces an employee’s immediate taxable income because contributions are tax-deferred. Many participants anticipate being in a lower tax bracket in retirement compared to their peak earning years, which may result in lower tax rates on 401(k) plan withdrawals in retirement. However, some participants, such as young employees with many working years ahead of them, may anticipate being in a higher tax bracket at retirement. If the 401(k) plan offers Roth 401(k) plan accounts, these participants can choose to pay tax on their contributions up front and pay no tax upon withdrawal. The ability to set aside some of their income on a tax-deferred basis, and in some cases to determine how their own contributions are allocated between a traditional and Roth 401(k), is just one way that 401(k) plans allow plan participants flexibility in tax planning for retirement.
• Tax-deferred growth. The money saved in a 401(k) plan grows and compounds more quickly because the total balance in the account isn’t taxed on a yearly basis.
• Employer match. Many 401(k) plan participants can increase their savings by taking advantage of an employer match—an additional contribution made by the employer that depends on how much the employee contributes.

In addition to those benefits, 401(k) plans are especially well suited for today’s economy because they are portable, employees have full ownership of their vested contributions and investment returns, and the 401(k) industry is constantly innovating to ensure that it keeps up with an evolving job market and workforce.

As part of an employee benefit package, and to encourage employees’ retirement saving, an employer may offer to match a certain amount of an employee’s 401(k) plan contribution. For example, an employer might match 50 cents on a dollar of a worker’s contribution up to 6 percent of pay. In this case, if an employee earns $50,000 and contributes 6 percent of pay to a 401(k) plan ($3,000), the employer would contribute 3 percent ($1,500) to the account, for a total contribution of 9 percent ($4,500). Alternatively, an employer might decide, for example, to match dollar for dollar up to 3 percent of pay, in which case, an employee earning $50,000 would get $1,500 in employer match for $1,500 of their own contributions.

Employers can make matching contributions on an employee’s Roth 401(k) plan contributions; however, the employer must allocate any matching contributions into a traditional pretax 401(k) plan account.

Vesting refers to the rights of ownership of a 401(k) plan account balance. Any funds contributed by the employee are, under the Employee Retirement Income Security Act of 1974 (ERISA), fully vested—or owned outright by the employee with no risk of forfeiture. However, contributions made by the employer on a worker’s behalf may be subject to a vesting period, which is the amount of time an employee has to work for an employer before earning the rights to the company’s contributions to his or her account. Vesting schedules vary from company to company, and often phase an employee in to full ownership rights over several years. When an employee is fully vested, it means he or she has earned the rights to all of the money an employer has contributed on his or her behalf to the 401(k) plan account.

Under our plan, you become vested in your Employer Contributions account immediately.

Many employees are confused by the term 401(k) deferral. This simply means the amount of money deducted from their paycheck into their 401(k) plan. This is income deferred (or saved) for a later date.

Yes. As of 2022, an employee can defer up to $20,500 total to a 401(k) plan per year as pretax or Roth contributions. If an employee is 50 years or older, the employee can defer up to $27,000 as pretax or Roth contributions by taking advantage of a $6,500 catch-up contribution.

A catch-up contribution is an additional contribution to a 401(k) plan that can only be made by an employee who is at least 50 years old. Once an employee has hit the plan’s contribution limit or the annual deferral limit of $20,500 (in 2022), he or she may contribute up to $6,500 as a catch-up contribution.

The possibility of contributing too much is not usually an issue because most employers automatically stop contributions once an employee hits the annual limit. It can become an issue if an employee changes jobs, however, because when an employee begins working for a different company, the new employer may not know how much the employee contributed at his or her old company. The employee may not know or may not tell the new company, causing the new company or employee to inadvertently contribute too much to the employee’s 401(k). In this case, the employee should alert their employer and any excess should be removed from the plan.

In addition to having money set aside for their retirement, employees benefit from 401(k) contributions by lowering their overall tax burden. Every dollar set aside in a 401(k) plan is earned income that is not subject to payroll and FICA taxes.

The same savings in payroll and FICA contributions apply to businesses that provide a 401(k) option for employees. Every dollar they fund into the plan saves businesses in their overall tax burden. For 2022, the Social Security tax rate of 6.2% and Medicare tax rate of 1.45%, combined will be 7.65%. And since employers match these amounts withheld from employee payroll, they minimally save 7.65% on every dollar an employee puts into the fund.

Additionally, if an employer matches employee contributions, any monies they contribute to the fund is considered a deductible business expense that can help reduce the company’s tax burden.

There are a few options for an employee when they leave their job.

• Since most 401(k) plans are administered by a third-party, employees can continue to hold the account (without additional payroll contributions) until they retire.
• Employees can move their 401(k) contributions to their new employer’s plan.
• Employees can move their investment (called a rollover) to a personal retirement plan – or IRA.
• Employees can cash out.

Withdrawing From Age 59 1/2 to Age 72
Access to your 401(k) funds after age 59 1/2 depends on whether you're still working.

Have You Retired?
You can access your funds at age 59 1/2 without paying an early withdrawal penalty if you're retired, and you ended your employment after you reached age 55. You must still have funds in your plan, and the rules are the same if you've rolled your 401(k) funds into an IRA. Age 59 1/2 is the earliest you can withdraw funds from an IRA account and pay no penalty tax.

Are you still working?
You can access funds from an old 401(k) plan after you reach age 59 1/2, even if you haven't retired. The best idea for old 401(k) accounts is to roll them over when you leave a job. If you are 59 1/2 or older, you will not be hit with penalties if you withdraw from your old accounts.
You may withdraw vested amounts from the Plan while you are still employed with us, but only if you satisfy the Plan’s requirements for in-service distributions. Different in-service distribution options apply depending on the type of contribution being withdrawn from the Plan.

Required Minimum Distributions
Required minimum distributions (RMDs) start at age 72, as of 2021. You must generally begin taking distributions from all your tax-deferred retirement plans, like IRAs and 401(k)s, when you reach that age. You must take your first RMD by April 1 of the year after you reach 72 if you turned 70 1/2 in the previous year.

Why do required minimum distributions exist?
The government requires 401(k) plan participants to withdraw a minimum amount from their 401(k) plan accounts on an annual basis to ensure that participants or their beneficiaries don’t avoid taxation altogether.

Yes. You can make changes to your deferral elections at any time. Any submitted election changes will typically be reflected on your future paycheck(s) starting with the next pay period.