Types Of 401(k) Plans

There are three types of cash or deferred arrangements:

• Salary Deferral Plans
• Cash or Deferred Plans
• Roth Deferral Plans

Salary Deferral Plans Salary deferral plans are the most common type of cash or deferred arrangement. Under a salary deferral plan, plan participants enter into a written agreement to defer a portion of their salary into the plan. These contributions are referred to as elective contributions and are considered plan assets. Managing these deferrals properly is a key task for an HR Generalist to ensure human resources compliance.

Example: Al earns $500 a week at Ace Electric Company. Al agrees to defer 5% of his weekly pay. This means that each week, $25 will be deducted from Al's check on a pre-tax basis and contributed to the Ace Electric Company 401(k) Plan. These calculations must align with FLSA standards for withholdings.

Cash or Deferred Plans Cash or deferred plans include a plan feature whereby the employer makes a contribution equal to a certain amount (generally a percentage of compensation) and the plan participant has the option of taking a certain percentage of the contribution in cash or as a plan contribution. This often falls under Section 125 or similar cafeteria-style election rules.

Example: Bill works for Beta Scientific Testing, Inc. At the end of the year, he receives a $5,000 bonus. Under the terms of Beta Scientific Testing, Inc.'s plan, Bill has the right to take up to 50 percent of this bonus in cash, with the balance contributed to the Plan. This means that Bill could defer the entire $5,000 into the plan or take up to $2,500 of the bonus in cash. The tax treatment of the $5,000 would depend on his election. To the extent the amount is deferred into the plan, the contribution will be made on a pre-tax basis. Any amount taken is cash is subject to income tax and labor law taxation requirements.

Roth Deferral Plans Under the Salary Deferral Plan, the employer has the option of also offering the deferral on a “designated Roth contribution“ basis. Roth deferrals are not excludable from gross income like a non-Roth elective deferral; however, if certain conditions are met upon distribution, the portion of the distribution attributable to designated Roth contributions (including investment earnings on those contributions) will be tax-free.