A 401(k) plan is the most well-known and popular plan type. It is a defined contribution (DC) plan, typically a profit sharing plan that contains a cash or deferred arrangement as described in section 401(k) of the Internal Revenue Code. A cash or deferred arrangement is simply one that allows plan participants to elect to defer a portion of compensation, their elective deferrals, and have it contributed to the plan on their behalf through payroll withholding. The employer may contribute to the plan by matching all, or a portion, of the elective deferrals or by making non-elective, or profit sharing, contributions to all eligible participants. Safe Harbor and Carve-out plans add provisions that allows easier participation and non-discrimination testing. Optional provisions may include Roth, Safe-Harbor, and/or Profit Sharing contributions (allocated in New Comparability, Cross-Tested and Age-Based formulas.
401(k) Plans are ideal for:
- Employers who are initiating a plan due to employee demand for an employee saving option
- Employers wishing to minimize contributions
- Employers wishing for discretionary contributions
- Plans with low participation rates (Safe Harbor)