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What is a 401(k) Plan?

A 401(k) plan is a type of profit sharing plan, but with a very important difference - the employees contribute their own money to the plan on a pre-tax salary reduction basis. The company's out-of-pocket expense, therefore, notwithstanding matching contributions (if any) and annual administration, is zero. Other types of qualified plans are usually funded with the company's own cash. The allowable salary reduction in a 401(k) plan is generally $13,000 (2004) per participant. The maximum total participant including employer funds is 25% of compensation.

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