Can Employees Directly Deposit Funds into the 401K?

I run an electronic equipment shop in Minnesota. Can my employees make direct deposits into their tax advantaged 401K instead of having me diverting a part of their paycheck into it?- Gary Anderson.

When you set up a 401K for your employees, only you can make their contributions into the plan. Your employees cannot add in their own funds to the 401K plan by depositing money directly without your knowledge or participation. Typically, what happens is that the employee decides on the contribution he can afford to make every month and this amount is deducted by you, the employer, from his paycheck and deposited to the 401K. His paycheck is reduced by the deposit amount and he pays taxes on this reduced paycheck.

Uncle Sam does not allow employees/ 401K participants to use this plan like a regular investment avenue because of the massive tax benefits that are offered with it. After all, if it were possible to ‘invest’ or park funds in this retirement plan, then many people would prefer to cut down their tax bills substantially by parking a major portion of their savings in such plans.

But, if your plan document has the right provisions, your employee can revise his contributions so that he puts in a larger amount every month into the 401K. This will still be carried out the same way, through a paycheck deduction that is done by the employer.  If you are using an end to end software suite like http://lifecycle401k.com/ to manage your business’s 401K, then your employees should have no trouble tracking their contributions so that they have a clear picture of their 401K account status at all times.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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