401(k) Plan
A type of qualified Defined Contribution Plan that permits employees to elect to defer compensation into the plan on a pre-tax, or in the case of Roth Contributions, post-tax basis. An account is maintained for each participant, and the retirement benefit is based on the account value at retirement. The retirement benefit is not guaranteed, as contributions will vary and fluctuations in the market will cause the account value to change.
Advantages:
- Allows employees to elect to contribute to their retirement via payroll deductions
- Employer contributions are tax deductible up to 25% of eligible participants compensation
- Employee contributions are tax deferred until distributed at retirement (except in the case of Roth contributions)
- Allows flexibility with employer contributions, employers may elect to have a discretionary contribution or a fixed match contributions
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