What Is A 401(k) Plan?

A 401(k) plan is a qualified retirement plan with a provision that allows plan participants to defer a portion of their salary into the plan on a tax-favored basis or on a designated Roth contribution basis. 

This type of arrangement is commonly called a "cash or deferred arrangement" and the amount that is deferred is referred to as an "elective deferral". 

In addition to elective deferrals, employers sponsoring 401(k) plans have the option of making additional contributions.  These contributions can be either discretionary or based on a formula set forth in the plan document.  

A common employer contribution to a 401(k) plan is a "matching contribution". A matching contribution is an employer contribution that is only allocated to employees who make elective deferrals.  An employer contribution that is not based on elective deferrals is referred to as a "non-elective contribution". Using Section 125 cafeteria plans in tandem with retirement offerings can further enhance an employee's total rewards package.

A matching contribution serves as an incentive for employees to participate in the plan. Maintaining these records is a vital part of human resources compliance. For an HR Generalist, understanding the nuances of contribution types is essential for accurate payroll and FLSA reporting.

Example: Case Security Company is looking for a way to attract and retain workers and reduce their annual tax liability. They have cyclical profits so they need some flexibility in making contributions to a retirement plan. Case Security determines that a 401(k) plan would meet its needs, and designs its plan to offer employees the ability to make elective deferrals that are matched at the rate of 50 percent on the dollar.  Case Security's plan also allows for a discretionary profit-sharing contribution to the plan that would be made in years that Case Security does well financially.