|Tax Topic #424
||2008 Tax Year
Topic 424 - 401(k) Plans
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 pretax 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.
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, and Topic 413, Rollovers from Retirement
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 employees' 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.
Page Last Reviewed or Updated: December 22, 2008
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