Although the 401(k) plan has been in existence since 1978 when Congress added Section 401(k) to the Internal Revenue Code, it has only recently become popular and accepted as the retirement benefit of choice in many organizations. This type of plan is also referred to as a “cash or deferred arrangement” (CODA) because it gives employees a choice between receiving cash currently or deferring the amount and having it contributed to the plan. In addition, many employers often match employee contributions, up to a certain percentage of salary. The 401(k) has become one of the most popular forms of qualified plans among both large and small employers. This section contains an overview of 401(k) plans—considerations, implementation, design, maintenance, and compliance.
A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.
- Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
- Employers can contribute to employees’ accounts.
- Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).
The ability of the employer to “match contributions” has generated interest in the plan at all employee levels. This is important because 401(k) plans include strict nondiscrimination tests that require lower paid employees to defer compensation under the plan, in proportion to highly paid employees—in accordance with one of several formulas outlined below. The minimum level of deferral for lower paid employees is determined under a statutory formula based on utilization of the plan by highly compensated employees.
Choose a 401(k) Plan
Establish a 401(k) Plan
- Steps to establishing a 401(k) plan
- How to include automatic contribution increases in a plan
- Sample automatic enrollment plan language
- How to establish designated Roth accounts in a 401(k) plan
Participate in a 401(k) Plan
- Contribution limits
- 401(k) topics for participants
- General guidance on participating in your employer’s plan
Operate and Maintain a 401(k) Plan
- Operating a 401(k) plan
- 401(k) topics for plan sponsors
- Reducing or suspending safe harbor nonelective contributions in cases of substantial business hardship
- 401(k) Questionnaire Final Report contains insights on plan operations and maintenance
Correct a 401(k) Plan
- 401(k) Fix-It Guide
Tips on how to find, fix and avoid common errors in 401(k) plans.
Terminate a 401(k) Plan
- Terminating a 401(k) plan
- A 401(k) plan provides an opportunity to contribute pretax dollars to a plan.
- A 401(k) plan must meet certain nondiscrimination tests.
- A 401(k) plan offers both benefits and drawbacks to the employer.
- Employees may withdraw money from a 401(k) plan prior to retirement, subject to certain conditions and limitations.
- There may be adverse tax consequences to taking an early withdrawal from the plan.
- As an alternative to a hardship withdrawal, an employee may wish to consider taking a loan from the plan.
- There are annual limits on the amount that can be contributed to a 401(k) plan.
- 401(k) Plan Illustration 1 — Tax Consequences of Plan Distributions
- 401(k) Loan Rules and Regulations
- 401(k) Checklist – Keep your 401(k) plan in compliance.
See the 401(k) Resource Guide for more details on 401(k) plans.