New Employees Orientation

Introduction

At NC & L, it is our priority to make the working environment a comfortable place with benefits for the present and security for the future. in lieu of this commitment, it has become important to inform new employees our the 401k plan approved by this company.

What is 401k plan?

401k is a defined-contribution retirement plan offered by many employers to eligible employees; it is a qualified plan established by employers wherein eligible employees make contributions from their salaries as a salary reduction method on a post-tax and/or pretax basis. In certain situations, employers make certain contributions to the plan on behalf of participating employees; they may also add a profit-sharing feature to the plan. It is called 401k plan because it is under section401k of the Internal Revenue Code in the United States and some other countries.

What about taxes on the income?

 Earnings accrue on a tax-deferred basis. This plan allows an employee to save for retirement.  Tax is charged on the saved contributions and the earnings until withdrawal. The contributions made can be on pre-tax or post-tax basis; if pre-tax, income tax is withheld on the contribution and its accruable earnings until the money is withdrawal. On the other hand, income tax is paid on the income before contributing to the plan and so may be withdrawn without tax.

How many plans exist?

The employee can choose from either of two plans: participant-directed or trustee directed plan. The participant-directed plan is commoner : here, the employee decides what percentage of the salary is contributed to the plan; he has the freedom also to choose investment options including mutual funds, money market tools, stocks and bonds. He can also invest in the company’s stocks.  He can change his distribution plan within these options at any time. On the other hand, trustee-directed 401(k) plan employs the service of employer appointed-trustees who choose the investment options for employee contributions.

What type of benefit plan?

A 401(k) plan is a type of defined contribution plan as against a defined benefit plan. This implies that the employee decides percentage of his salary for contributions. The plan also details the extent to which employer can also contribute. For a defined benefit plan, the benefit that participants would receive at retirement is spelled out in the plan.

What about its advantages?

401k plan has a number of advantages: it is a salary reduction plan. Therefore, the taxable salary is reduced. The contributions made into plan are invested and earnings accrue. Income taxes on the contributions and earnings then depend upon the whether it is pre-tax or post-tax.

Besides, 401(k) plans are tax-qualified plans such that assets held by the plan are protected from the employer’s market status. This means that when the employer goes bankrupt, investments into the plan are secured because there is a rule under the Employee Retirement Investment Security Act [ERISA 1974] that contributions accrue to the benefit of the employees. However, this law does not hold for investments into the company’s stocks. In such a situation, the employee loses part of his contribution invested into the company.

In 401k plan also, the benefits accruable to participating employees is proportional to value of their contributions; the higher the value, the higher the earning and vice versa.  Employees can also withdraw money as loan from the investment; the repayments would be contributed as after-tax fund with predetermined interest rates.

Withdrawal of investments

If a situation the employer withdraws before retirement or stops working for the company before retirement, a percentage of the accruable income is deducted. Incomes taxes are also charged accordingly. It is advised that investments into this retirement plan should not be withdrawn before retirement.

Conclusion

401k plan is a salary reduction plan that allows employees gain control of the future by investing part of their salaries now; then retirement would be memorable!