401K Plan Laws

If you are involved in a 401(k) retirement program with your company, chances are that you are not the one administering the plan. In order to understand how your retirement funds are being used, you should have a basic understanding of the laws surrounding a 401(k) plan. 401(k) plan laws are created and enforced by the IRS.


An employee can take loans against his 401(k) plan prior to the age of 59 1/2. This differs from an IRA retirement plan, which allows no access to funds before the age of 59 1/2. The IRS has no limits on how much can be taken out in loans from a 401(k), but your company may have set limits that you would need to follow. The law does stipulate that you must pay the loan back, with interest. While you have the option of withdrawing funds from your 401(k) prior to retirement, you will be subject to federal income tax on the money you withdraw along with a 10 percent early withdraw penalty from the IRS.

Contribution Limits

According to IRS tax law, in a traditional 401(k) an employer can match employee's funds equally, or at a reduced percentage. The matching percentage can also be changed from year to year. Other types of 401(k) plan contribution limits get a bit complicated. An employer is not obliged to make any contributions to a 401(k) or match any employee funds.

An automatic enrollment 401(k) plan is set up immediately when the employee is hired, and funds are automatically withdrawn from the employee's pre-tax pay. The maximum amount an employee can contribute is 10 percent of his income. In the first year the employee must contribute a minimum of 3 percent, and that must double to 6 percent by the fifth year of enrollment. The company can either match the first 1 percent of contributions, then 50 percent after that up to a maximum of 6 percent, or it can contribute a flat 3 percent to all employees.

In a safe harbor 401(k) plan, the company can match up to 3 percent of the employee's income for the year, and then 50 cents for every dollar contributed by the employee above 3 percent.

For any kind of 401(k) retirement account, as of 2010, the maximum amount that can be contributed on behalf of any employee with a combined employee and employer contribution is the lesser of the total employee compensation for the year or $49,000.


Vesting is the process by which the ownership of money contributed by a company into a 401(k) is determined. With a safe harbor and automatic enrollment 401(k) program, any money contributed by the company is automatically vested and becomes available to the employee immediately. In a traditional 401(k), the employer can create a vesting schedule that makes only a percentage of the vested amount available to the employee. That percentage goes up as the years of service increase until it reaches 100 percent ownership by the employee.

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