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 Texas, as in all states, a 401(k) plan is governed by federal law, specifically the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code. The key features of a 401(k) plan include the ability for employees to make elective salary deferrals which are excluded from their taxable income, with the exception of Roth 401(k) contributions, which are taxed upfront. Employers have the option to make contributions to their employees' 401(k) accounts, which can be matched up to a certain percentage. Upon retirement, distributions from a traditional 401(k) account, including any earnings, are subject to income tax, while qualified distributions from a Roth 401(k) are generally tax-free. It's important to note that while the state of Texas does not have a state income tax, federal income tax still applies to 401(k) distributions. An attorney specializing in tax or employment benefits can provide more detailed information about 401(k) plans and their implications under both federal and state law.
