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For average earners, the 401(k) savings plan has special benefits. Tax-deferred pool allows contributions by employer; holder may borrow funds

By Lynde McCormickSpecial to The Christian Science Monitor / February 15, 1985


Uncle Sam has not offered much to the little guy with all the tax reform that's hit the boards in the last few years. Most of the new benefits went to businesses and income earners in the higher brackets. The exception, however, is an item called the 401(k), or salary savings plan, an important part of pre-Reagan tax reform. The 401(k), when set up by an employer, allows employees to contribute a portion of their paychecks to an investment pool and defer taxes on these contributions as well as the earnings on them. A 401(k) works much like an IRA, but with a few extra perks. The money can be borrowed by the employee; it can be income-averaged for 10 years when cashed out at retirement; and employers can match employee contributions, using the fund as a less expensive profit-sharing or pension fund.

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``These things have been received with enormous enthusiasm,'' comments one tax and investment adviser, ``not only because they are a good deal, but because people are getting the message that social security probably won't be there when they are ready to retire. They see the 401(k), and quite rightly, as a relatively painless and much more lucrative way to fill the gap that will be left by social security.''

The Treasury Department's tax simplification plan, however, has proposed eliminating the 401(k). The department argues that the IRA is a more ``appropriate vehicle'' for deductible retirement contributions. The only people who can have a 401(k), the Treasury notes, are those whose employers have offered them, whereas IRAs are available to everyone ``without regard to form of employment or occupation.''

Proponents of the 401(k) contend, however, that participation rates among people offered a 401(k) are much higher than the rate for IRAs. In part, this is because of matching contributions made by employers, more accessible information and answers to employees' questions, and the ease of making contributions through payroll deduction plans.

Initially, 401(k)s struck a sweet spot primarily with large corporations, such as those in the Fortune 1,000, says Jerry Marrs, who heads the tax department at Arthur Young & Co.'s Denver office. ``Now, though, we're seeing a lot of interest from smaller corporations. There's been no letup in interest that I've seen. If anything, they've become more popular as more companies learn about them. If it's any indication of the popularity, Arthur Young has set up a plan for its employees.''

As they rush to the 401(k) trough, however, companies need to understand that, like most good things, especially from Uncle Sam, there are a few trade-offs, one or two strings attached. Unless it is well planned, a 401(k) can add considerably to a company's administrative burdens. The IRS sets strict discrimination standards designed to prevent the higher-paid one-third of employees from contributing proportionately more than the lower-paid two-thirds, and those standards have to be maintained scrupulously.