Categories: BUSINESS & FINANCE

What is a 401b Retirement Plan

Overview
Questions about the elusive 401b retirement plan have been cropping up on the web and finding information regarding its form and structure is difficult. As of 2010 it is no longer available as a 401b. The 401a and 401b retirement plans were the for-runner of the current 401k retirement plan offered by most employers today. The plans were offered from the late 1990’s to 2002.

Description of 401b
The term 401b refers to the IRS tax code (401 is the section and b is the paragraph), however, the codes for the original plans are no longer available to view. Both the 401a and 401b retirement plans were replaced by the 401k and are governed by the same regulations regarding deferrals and mandatory withdrawal at age 70 ½.

Description of 401K plan
A 401k retirement plan is a tax qualified deferred compensation plan where an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pre-tax basis. Elective contributions are not subject to income tax at the time of deferral and are not reflected on the form 1040. They are subject to Medicare, Social Security, and Federal Unemployment Tax and are included as wages for those deductions.

Amount of contributions
The amount an employee may contribute to a 401b plan is governed by IRS code for the 401k plan. The contributions may also be limited by the terms of the plan itself. Your employer may set up an automatic contribution arrangement and as of 2009 the maximum contribution should be $16,500.00. Each plan year your employer or administrator is required to give you a notice of your rights under the plan. At that time you may elect to make changes to the contribution or opt out of the arrangement.

Distribution of funds
Distributions from a 401b plan, like the 401k plan, may qualify for a lump sum distribution treatment or rollover treatment as long as they meet the respective requirements. Employees may also qualify for hardship withdrawal due to immediate financial need. Hardship withdrawals are limited to the employee’s contributions and do not include income earned on the deferred amount. Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies.

401b confused with 403b
A 401b retirement plan is often confused with the 403b retirement plan. The 403b retirement plan is most often a tax-sheltered annuity account or custodial account invested in mutual funds. It is offered only to school employees, non -profit organizations or ministers.

Participation in the 401b plan
If you are a participant in a 401b retirement plan it will simply function the same as a 401k retirement plan unless there are specific restrictions in the original setup. If you have more questions your financial advisor or tax consultant will be able to guide you.