408(k) Plan

408(k) Plan Meaning:
In retirement terminology, the term 408(k) Plan refers to a United States retirement plan which meets the requirements of the Internal Revenue Code or IRCís Section 408(k). This section of the IRC defines and details the qualification rules for 408(k) trusts and plans. A 408(k) plan is also known as a Simplified Employee Pension or SEP. In the 408(k) Plan, the employer also contributes to the retirement account even though the employee is the owner of the plan.

408(k) Plan Example:
For example, the 408(k) plan is set up by the employer and has many of the same features of a 408(k) Plan. Taxes are deferred until the employee takes a distribution from the plan at retirement or when they have reached the age of 59 Ĺ, whereupon the funds are taxed as regular income. As in other retirement plans, loans on the amount accumulated can be taken out by the owner and the repaid amount reverts to the 408(k) balance. The IRS assesses a 10% penalty on early withdrawals from 408(k) plans. The principle difference of the 408(k) Plan to the 401(k) Plan is that the 408(k) Plan is only available to companies with 25 employees or less. Another feature of the 408(k) consists of the fact that employer contributions to the account are not taxed.