Section 401: Overview, definition, and example
What is Section 401?
"Section 401" often refers to a specific provision or clause within a legal document, such as a contract, statute, or regulation, that deals with a particular topic or set of rules. In the context of U.S. law, Section 401 can refer to different parts of various laws or regulatory frameworks. One of the most common references is to "Section 401" of the Internal Revenue Code (IRC), which relates to qualified retirement plans, particularly 401(k) plans. These are employer-sponsored retirement savings plans that allow employees to contribute a portion of their salary to tax-deferred accounts.
For example, Section 401 of the IRC provides guidelines for setting up and managing retirement savings plans that offer tax benefits to both employers and employees, such as 401(k) plans.
Why is Section 401 important?
Section 401 is important because it governs essential financial regulations that impact both individuals and organizations. In the context of retirement plans, such as 401(k) plans, it ensures that these plans meet specific requirements, including contribution limits, eligibility rules, and tax treatment. For employers, it provides a structured way to offer retirement benefits to employees, helping with employee retention and satisfaction. For employees, it offers a tax-advantaged way to save for retirement.
Outside of the retirement plan context, Section 401 can be used in other legal documents, and its importance depends on the specific subject matter it addresses.
Understanding Section 401 through an example
In a business context, if an employee participates in a company’s 401(k) retirement plan, Section 401 of the Internal Revenue Code determines the maximum contribution limits for both employees and employers, the tax benefits, and the rules for withdrawal. For example, in 2023, the IRS set a contribution limit of $22,500 for individuals under 50, and $30,000 for those over 50, which would be specified under Section 401.
Another example could involve a contract where Section 401 of the agreement outlines specific obligations for performance or delivery by one of the parties. If the contract is being reviewed and negotiated, this section would be scrutinized to ensure that both parties understand their rights and obligations.
Example of Section 401 clause
Here’s how a Section 401 clause might look in an employment agreement or benefits document:
“The Employer will establish and maintain a 401(k) retirement plan for eligible employees, as outlined in Section 401 of the Internal Revenue Code. The plan will allow employees to make tax-deferred contributions up to the maximum limit set by the IRS each year.”
Conclusion
Section 401 typically refers to a specific provision within a legal document that governs important rules, often related to financial matters, such as retirement savings plans. In the context of retirement plans, Section 401 helps ensure that employer-sponsored retirement plans, like 401(k)s, operate within the guidelines established by the Internal Revenue Code. It is a critical provision for both employers offering these plans and employees benefiting from them, providing a structured and tax-advantaged way to save for the future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.