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Employment law

retirement plans—401k plans

A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Some of the key features of 401k plans are:

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).

• Employers can contribute to employees’ accounts.

• Distributions—including earnings—are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

In Alabama, as in all states, a 401(k) plan is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. The contributions made to a 401(k) are typically tax-deferred, meaning they reduce a person's taxable income. However, Roth 401(k) contributions are made with after-tax dollars and can be withdrawn tax-free in retirement, provided certain conditions are met. Employers may also make contributions to an employee's 401(k) account, which can be in the form of a match or other type of contribution. Upon retirement, or when the employee is eligible to take distributions, the funds from a traditional 401(k) are taxed as ordinary income. Alabama follows the federal guidelines for 401(k) plans, and there are no specific state statutes that alter the federal rules for how 401(k) plans operate within the state.

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Employment law

retirement plans—401k plans

Individual & Family Legal Plan

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Alabama State Code

Alabama State Code

Employment law

retirement plans—401k plans

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