3752 / What is a 401(k) plan?

A 401(k) plan generally is a profit sharing plan or stock bonus plan that provides for contributions to be made pursuant to a “cash or deferred arrangement” (“CODA,” see Q 3755) under which individual participants elect to take either amounts in cash or to have the amounts deferred under the plan. With the availability of Roth contributions under 401(k) plans, the employee also may elect to have Roth deferrals made on an after-tax basis to the CODA.

In addition to the general qualification requirements ( Q 3838 through Q 3936), special qualification rules apply to 401(k) plans ( Q 3753 to Q 3808). Certain nondiscrimination requirements can be met by satisfying the requirements for safe harbor plans ( Q 3773). There are requirements for SIMPLE 401(k) plans ( Q 3778) and there are automatic enrollment plans for plan years beginning after 2007 ( Q 3762).

The elective deferral limits apply to individuals participating in more than one salary reduction plan, such as a 401(k) plan and a Section 403(b) tax sheltered annuity or SIMPLE IRA
( Q 3760). There also are requirements that pertain to catch-up contributions by participant’s age 50 or over ( Q 3761).

Amounts deferred under a 401(k) plan are referred to as elective deferrals ( Q 3760). Elective deferrals generally are excluded from a participant’s gross income for the year of the deferral and are treated as employer contributions to the plan.¹ In the case of contributions to a qualified Roth contribution program ( Q 3779), deferrals are made on an after-tax basis (i.e., they are treated as includable in income for withholding purposes).²

A 401(k) plan may provide that all employer contributions are made pursuant to the election or may provide that the cash or deferred arrangement is in addition to ordinary employer contributions. Typically, the employer contributions are in the form of a percentage match for each dollar deferred by an employee. There are requirements that apply to matching contributions ( Q 3804, Q 3808).

Note: On December 16, 2019, the SECURE Act³ was enacted and made a number of significant changes (some effective immediately upon enactment) to retirement plan rules. Many of these changes impact 401(k) plans and their operations, like the need to annually communicate lifetime income to participants, expansion of mandatory participation to certain long-term part-time employees, and a change in the “required beginning date” and allowable distribution periods for required minimum distributions. Others reduce the burden and cost for an employer to adopt or maintain a plan.

A number of legal and regulatory changes prior to the SECURE Act impact certain substantive 401(k) limitation rules regarding hardship, loans and other pre-59½ distributions, especially in the case of areas officially declared to be national disaster areas for hurricanes, floods, fires
Q ), and the COVID-19 pandemic. Some changes, like extension of time to repay 401(k) loans, do not require a disaster justification.