How did 401k plans get their name

How did a 401K plan get its name

In all my years as trustee of Pension and 401k plans, nobody has ever asked me how a 401k plan got its name. Well here is the simple answer.

Any time Company makes some form of compensation payment to or for an employee, that payment would be immediately taxable to the employee unless the compensation is covered under a Qualified Compensation Plan (Pension Plans, Savings Plans, Profit Sharing Plans, Deferred Compensation Plans). If the Company pays you salary, it is taxable deductible to the Company as an expense, and taxable to the employee as receipt of income. The employee and the IRS receive a record of such payment ie from W-2.

The Company may contribute to a Pension Plan or 401 K plan set up on behalf of the employees. In order for the Company to receive a tax deduction for the contribution, and the employee to defer taxes until he actually receives the contributions, the Pension Plan must adhere to a myriad of requirements, such as minimum participation requirements, vesting rules, etc. These rules are stipulated in the the IRS Code. Technically, a Pension or 401k plan does not have to follow any of the rules established by the IRS. However, if the plan does not follow the rules, the amount contributed by your employer will not be tax deductible to the Company and will be immediately taxable to the employee as compensation.

 

Qualified Pension, Profit Sharing and 401k Plans

Once your Company decides upon the provisions of the Plan, the Company applies to the IRS for approval that the Plan meets all the stipulations. Once approved, the Plan is “Qualified” by the IRS. You may see in your Summary Plan Description that the Plan is Qualified under section 401 of the IRS Code. Section 401 of the Code lays out the rules for each type of Deferred Compensation plans. Subsection 401(a) will cover Pension Plans. Section 401(k) covers the deferred compensation arrangement developed in 1974 and continues today. I was working when then these plans came into existence and many people expected some flashy name to be attached to the plans, such as super savings plans or ultra retirement plans . This did not happen and the plans were simply dubbed “401k plans” after the section of the IRS code which applied to them

The chart below shows the sections of the IRS code (IRC meaning Internal Revenue Code) described by topic:

IRC Topics By Section

Sections

Function

1-15

Tax rates

21-54

Credits (refundable and nonrefundable)

55-59A

Alternative Minimum Tax & environmental tax

61-90

Definition of gross income (before deductions), including items specifically taxable

101-140

Specific exclusions from gross income

141-149

Private activity bonds

151-153

Personal exemptions; dependent defined

161-199

Deductions, including interest, taxes, losses, and business related items

211-224

Itemized deductions for individuals

241-250

Deductions unique to corporations

261-291

Nondeductible items, including special rules limiting or deferring deductions

301-386

Corporate transactions, including formation, distributions, reorganizations, liquidations (Subchapter C)

401-436

Pension and benefit plans: treatment of plans, employers, & beneficiaries

441-483

Accounting methods & tax years

501-530

Exempt organizations (charitable and other)

531-565

Accumulated earnings tax and personal holding companies

581-597

Banks: special rules for certain items

611-638

Natural resources provisions: depletion, etc.

641-692

Trusts & estates: definitions, income tax on same & beneficiaries

701-777

Partnerships: definitions, treatment of entities and members, special rules (Subchapter K)

801-858

Insurance companies: special rules, definitions

851-860

Regulated investment companies (mutual funds)

861-865

Source of income (for international tax)

871-898

Tax on foreign persons/corporations; inbound international rules

901-908

Foreign tax credit

911-943

Exclusions of foreign income (mostly repealed)

951-965

Taxation of U.S. shareholders of controlled foreign corporations (Subpart F)

971-999

Other international tax provisions

1001-1092

Gains: definitions, characterization, and recognition; special rules

1201-1298

Capital gains: separate taxation and special rules

1301-1359

Interperiod adjustments; certain special rules

1361-1388

S Corporations and cooperative associations: flow-through rules

1391-1400T

Empowerment, enterprise, and other special zones

1401-1403

Self employment tax (like social security, below)

1441-1465

Withholding of tax on nonresidents

1501-1564

Consolidated returns and affiliated groups (corporations)

2001-2210

Estate tax on transfers at death

2501-2704

Gift tax and tax on generation skipping transfers

3101-3241

Social security and railroad retirement taxes

3301-3322

Unemployment taxes

3401-3510

Income tax withholding; payment of employment taxes

4001-5000

Excise taxes on specific goods, transactions, and industries

5001-5891

Alcohol, tobacco and firearms taxes and special excise tax rules

6001-6167

Tax returns: requirements, procedural rules, payments, settlements, extensions

6201-6533

Assessment, collection, and abatement; limitations on collection & refund

6601-6751

Interest and non-criminal penalties on underpayments or failures

6801-7124

Other procedural rules

7201-7344

Crimes, other offences, forfeitures, tax evasion

7401-7493

Judicial proceedings

7501-8023

Miscellaneous rules

9001-9833

Special taxes & funds (presidential election, highway, black lung, etc.)