401(k) Plan Public Law 93-406

During 2003, an employee cannot elect to defer more than $12,000 for all 401(k) plans in which the employee participates. This limit will increase by $1,000 annually until 2006 when the limit for total contributions will be $15,000. Employees age 50 and over can contribute an additional $2,000 in 2003 (also increasing in $1,000 increments until 2006) to help bolster their retirement savings.

Small businesses with 100 employees or less can offer other forms of 401(k)s to their employees, such as SIMPLE 401(k)s, which have fewer administrative burdens than traditional 401(k) plans. With a SIMPLE 401(k), employers must provide a match to participating employees. As of 2003, the total annual contribution to a SIMPLE 401(k) cannot exceed $8,000. Other 401(k) variations include a single participant 401(k) or ?Solo(k),? which is designed for business owners with no employees and a Roth 401(k) which will go into effect in 2006 and will be similar in structure to a Roth IRA. While 401(k) plans are offered in the private sector, the non-profit and public sectors offer plans with similar features that are also named for the applicable section of the Internal Revenue Code. The public sector offers a 457 plan and the non-profit sector offers a 403(b) plan.

Similar to IRAs, most 401(k)s are held by middle- and upper-income households. Many low wage jobs do not offer 401(k)s and the tax benefits of these retirement plans are limited for those with lower incomes.