401(k) Plans

401(k) plans are the most popular type of defined contribution plan. They are profit sharing plans that also allow employees to contribute a portion of their wages to the plan on a tax-deferred basis. Typical contribution arrangements also include:

Roth contributions – employees are allowed to make Roth contributions to the plan through payroll deduction (plan must also allow for 401(k) deferrals)
Matching contributions – employer makes a contribution to the plan based on the employees’ 401(k)/Roth deferrals (used to encourage participation and contributions may be subject to vesting)
Safe harbor matching contributions – employer makes a special type of matching contribution that is 100% vested (either 100% on the first 4% of deferrals; or 100% on the first 3% and 50% on the next 2%); in exchange, the plan is deemed to pass the ADP/ACP test
Safe harbor nonelective contributions – employer makes a 3% contribution on behalf of participants that is 100% vested; in exchange, the plan is deemed to pass the ADP/ACP test (plans can also be designed to use a “wait and see” approach with respect to the safe harbor nonelective contribution)
Profit sharing contributions – employers can make profit sharing contributions to the plan and can use any options available for a traditional profit sharing plan (contributions may be subject to vesting)

Just like traditional profit sharing plans, 401(k) plans offer great flexibility and can include a variety features such as automatic enrollment, participant loans, hardship distributions, participant direction of investments, daily valuation, and many other options.

For companies that want to maximize tax-deferred savings for owners, partners and other key employees, 401(k) plans are often coupled with a cash balance plan.