The 401(k) is one of the most popular types of defined contribution plans and has been widely adopted as a retirement plan for American workers. In today’s economic environment, 401(k) plans are a critical piece of the overall compensation package for small to medium-sized business and are aimed to attract, retain, and reward talented employees. When you offer a 401(k) plan, numerous initial and continuing requirements must be met to ensure that the plan retains its qualified, and therefore tax-advantaged, status. Once a plan is established, annual testing, yearly contributions, and yearly government filings may also be required.
In a 401(k) plan, an eligible employee elects a percentage or dollar amount of his salary to contribute to the plan and the employer deducts the contributions through payroll that are then deposited to an account established for the employee. Employees can choose to contribute either traditional pre-tax contribution or, if allowed by the plan, Roth after-tax contributions. Often, but not always, the employer will contribute a matching amount to encourage an employee to take advantage of the workplace retirement vehicle.