Tax Accounting Information


The 401k plans are contribution planswhich are enforced by employers as a driving force for retirement investments. The retirement plan is primarily aimed at enabling the employees to defer some portion of their paycheck to the retirement account automatically each month in the working period. However, there are usually set up the standard which guide the saving procedure. The 401k retirement plan deduction is made directly from the employee’s paycheck. Thus the reduction is formed in the best and effective manner in which employees can save for retirement purposes. The plan is therefore essentialin allowing employers to create a retirement plan to the employeeson a pre-tax basis.

Limits of the 401k retirement plan

The 401kplan enables the employer in the company toquickly match the employees’contributions to the tax-deductible company deductions. The earnings on the contributions are designed to accumulate tax-deferred until when the employees withdraw during retirement process. Moreover, the employees in the company can borrow funds from their 401k accounts before they retire at meager interest rates to be charged by the company. Employees in the company may also decide to roll over money in the 401k accounts to another effective retirement plan without attracting any penalties due to shifting in job positions.

However, for effective operations of the 401k retirement plan, it works with some central limits which are essential in the activities of the 401k plan. The current employee contribution limit in the firm for employees depends on their earnings (Blasé, Freeman & Kruse, 2017). In the 401k retirement plan is $19000. This limit entails all the employee salary deferrals and the contribution made after tax is deduced. However, if an individual holds various 401k accounts for retirement contribution, all the accounts cannot surpass $19,000. After this, contribution to other retirement accounts do not influence the 401 contribution limit. However, to motivate the employees who are close to retirement to increase their savings, the Internal Revenues Service enables employees who are 50 years and above to make additional contributions immediately they meet the standard contribution limit. Employerswho are 50years of age and above are allowed to make extra $6,000 whenever they reach the maximum 401k which is the maximum amount.

The internal revenue service in the company controls the amount of money contributed by employees regardless of what they earn in the company. The employees’ limits on their contributions are set at $ 37,000. In the operations of the form, the employer matching and elective contributions are $6,000. However, with an addition of $6,000 contribution, the total annual contribution to the 401k plan for employees is $62,000. Furthermore, if an employee is not above 50 years and has earned an amount like $ 50,000 yet they are supposed to contribute 19000, the outstanding balance has to be obtained from the employer. If the employer contributes $ 10,000, then the overall contributions are set at $ 29,000

Special Treatment to Highly compensated employers

According to the Internal Revenue Service, a highly paid employee happens to have more than 5% ownership in the business enterprise and the concept of property does not at any time apply to the amount of compensation. The highly compensated employee moreover receives more than $120,000 in the previous year and is ranked among the 20% of employers by compensation. The primary purpose of the highly compensated employee 401k reduction plan is to avoid the individuals with the highest paid amountsfor taking over the advantages of retirement plans sponsored by the employers. The internal revenue service is created to monitor and control imbalancein the company such as employer with a salary of $150,000 annually contributing more than the individual earning $ 60,000. However, the 401k plans have to be designed in a way that all contribution amounts made for the employers earning less are directly proportional to the highly compensated employers to maintain fairness in the organization.

The highly compensated employee is thus given an interest rate of 5% in the retirement plan at any point during the previous year no matter what the compensation appears.  The highly compensated employers thus in the company contribute more contributions than the other employees. Owing to this, the high earners benefit more from the plan which is tax-free and enabled them to effectively lower tier tax liabilities. The additional advantage that the highly compensated employers had is that the interest rate of 5% is focused on the interests that accrue to his entire relatives. The total compensation for the higher compensatedemployers includes commissions, bonus, and nondiscretionary benefits in the payments.

Analysis of the 401k retirement plan

In analyzing the program in terms of tax valuation, it is one of the best ways to save in the 401k plan. It is much easier for the employees to sign up for the plan because the contributions to the retirement plan are made before the paycheck arrives. However, in the 401k plan, theinputs are tax-deferred which thus enable the employer to work harder. Moreover, some fees have to remit some payments to manage the 401k retirement plan. The degree of the retirement plan is usually directly proportional to the size of the company. If a firm is smaller in format, it means that its fees are going to be higher.

The retirement plan works best if the perfect match is found. Companies have to match the employee contributions to ensure effective 401k plan. The retirement plan contributes to the same amount that an individual provides to them. Say if an employee contributes 4% to the company, there is a high possibility that the company will add 4% in the retirement plan. The move for the amount of contribution to the project relies on the distribution patterns of the company. This case sees an employee missing out on thecompany match the entire period in a year if at all they maximize their retirement plan contribution. The retirement plan is controlled by the employee retirement income security act and the tax code. By this, the employers’ balance relies on his contributions that are made to the retirement plan and the performance of plan investments. The employers match contributions of the employees to particular percentages and contributions made by profit sharing.

The 401k retirement plan contributions are invested in a mutual fund’s portfolio. The retirement plans have an index fund choice which has cheap ways to invest in a classified group of assets. However, employees managing the retirement plan is more comfortable as they can quickly withdraw the 401k plans when the project comes to an end and when the employee goes through hard times as indicated in the retirement plan(Junaid, 2018)

Tax implicationsof the 401k retirement program

The 40k plans enable the firm to plan for its employers by allowing them to save for retirement and be taken when the agreed time comes to pass. The Internal revenue service considers that the setting up of the 401k plan can be costly for the business. The business is eligible for tax credit in the expenses of setting up the 401k plan. The retirement program makes the employee claim half of the general costs for creating awareness to employees about the project. The retirement program is thus a tax credit as it decreases the tax by dollars.

The retirement program also has implications for employee contributions. The contributions of employees are influenced, and the firms do not get out of tax contributions where the employees put their 401k retirement accounts. The employee does not withhold the federal income tax for them. The employees have to pay theirsocial tax. The employer is also supposed to pay shares of employers of payroll taxes by contributions to the employees.

The 401k retirement program has clear tax benefits. This is due to the employee contributinga specific percentage of the employee’s income to a 401k plan on a pretax basis. Therefore, the amount that is being provided on the 401k plan is exempted from the current state income tax hence decreasing the taxable income.

Furthermore, the 401k plan contribution accrues by the tax-deferral(Hasseldine, 2017). The capital gains that are achieved are not subjected to taxes until when the recruitment plan begins.  This implies fewer taxes on the withdrawals of the 401k retirement program. This is because many employers earn a smaller income in the period of retirement which positions the employers realizes a lower tax bracket.

There are clear tax implications on the employer match. When the employees’ contribution is matched according to the contributions, the money contributed is usually tax—free. The employees do not earn income or taxes on the employees’ contributions. The employees don’t pay income tax on monetary contributions. The retirement plan applies the concept that the federal tax and employee’s insurance carries to make the employer exclude the wage calculations from purposes of the tax-free on employee contributions match. Concurrently, the employee claims expenses on business taxes return for the amount of money that is contributed to employee accounts.


The contribution s that employees make into the 401k proportionality reduce the gross income thus decreasing the general tax liability. Employers thus provide a contribution match to a specific percentage of their salaries. The 401k plans make it easy for payroll deductions. The contributions of the 401k plan being based on deductions mean that it reduces the gross income and lowering tax liability. However, it is more useful to apply the Roth 401k plans which determine contributions that are made on a pre-tax and post-tax basis(Strosberg, Campo & Renton, 2017). The understanding of implications of the retirement program to know the amount of money accessible when needed. Thus, it is advisable to consider the amount available rather than the amount of money obtained after tax deductions.



Blasi, J. R., Freeman, R. B., & Kruse, D. L. (2017). Shared Capitalism in the USA. The Oxford Handbook of Mutual, Co-Operative, and Co-Owned Business, 25.

Hasseldine, J. (Ed.). (2017). Advances in taxation. Emerald Group Publishing.

Junaid, K. A. (2018). Comparative Study on Retirement Plan between Bangladesh and the United States of America (USA).

Strosberg, D. S., Campo, S. E. M., & Renton, D. B. (2017). Retirement: 401k, Roth IRAs, College Funds, and More. In The SAGES Manual Transitioning to Practice (pp. 113-123). Springer, Cham.

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