What are the Requirements of a 401K Plan?

A 401(k) plan must meet a variety of requirements established by the IRS, to be a qualified plan. Some of those requirements include:  

Defined Contribution Limits: The IRS sets annual contribution limitations for 401(k) plans. There are two limits: one for employee contributions and the other for overall contributions (including all employee and employer contributions). Employees who are 50 years old or older at the end of the year may make additional “catch-up” contributions up to a maximum amount set by the IRS.

Distribution Rules: The money in a 401(k) plan accumulates tax-deferred, but withdrawals must fulfill certain criteria, such as the employee’s retirement, death, disability, or separation from work. Furthermore, if an employee reaches age 59 1/2 or faces hardship as defined and permitted by the plan, he or she may withdraw funds.

Limits for High-Income Earners: Employees whose yearly income or stake in the company meets a specific level are restricted by the IRS to contributing only a part of their earnings. The IRS does non-discrimination testing (NDT) on 401(k) plans to verify that highly compensated employees (HCEs) are not prohibited from participating disproportionately more than other workers at the firm.

Clear Vesting Schedule: A vesting schedule is a plan that determines when an employee is eligible to receive all or part of the employer contribution. Vesting can be based on how many years the employee has worked for the company, but other factors are possible as well. Generally, employers pick a timeframe where 401(k) plans are fully vested – typically one to three years of service. However, the Internal Revenue Code also allows for retroactive vesting to date of hire if a company so desires.

Visit the IRS website for more information on full qualification requirements, or reach out to one of our client specialists.  


To connect on more details on 401K please visit – Six Reasons the ESI Multiple Employer Plan (MEP) 401K Gives You Peace of Mind – eEmployers Solutions, Inc. (eesipeo.com)

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Payroll Admin

Still doing your own payroll? Tasks involved with Payroll and Employee Administration are purely transactional events.

Human Resources

At ESI, our business is all about assisting with the management of any organization’s most valuable resource: people.

Employee Benefits

A benefit package can be a major incentive to lure the best new talent to your workforce and keep your current employees happy.

Risk Management

Risk is a basic part of business. As a co-employer we work to eliminate, mitigate or share your associated legal liabilities.

HCM Technology

ESI continuously utilizes the latest in technological advances through online and mobile solutions to make your life easier.