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What is a 401(k)?


401(k)s are named for the section in which the Internal Revenue Code authorized and specified the use of this type of defined contribution plan that allows employees to make pre-tax contributions.

Generally, 401(k) plans are known to be a type of retirement savings plan that employers can choose to set up for their employees. Employee 401(k) contributions are automatically deducted from their paycheck each pay period before taxes are taken out. Employees' contributions are invested, at their choosing, into one or more funds provided in the plan. Employers may choose to match the funds. Employer costs for plan are tax-deductible and employees' contributions are tax-deferred. Different types of 401(k)s include:

Traditional 401(k) Plan

  • Offers the most flexibility of the three types of plans
  • Allows eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions
  • Employers have the option to make contributions on behalf of all participants, to provide a match, or do both
  • Contributions can be subject to a vesting schedule
  • Allows participants to make pretax contributions through payroll deductions
  • Annual testing ensures that benefits for employees are proportional to benefits for owners/managers
  • For employers of any size and can be combined with other retirement plans

Safe Harbor 401(k) Plan

  • Similar to a traditional 401(k) plan, but must provide for employer contributions that are fully vested when made
  • Allows eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions
  • Subject to the some of the tax rules associated with a traditional 401(k) plan, including annual nondiscrimination testing
  • For employers of any size and can be combined with other retirement plans

SIMPLE 401(k) plan

  • Available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year
  • The employer is required to make employer contributions that are fully vested
  • Not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans
  • Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer

Other 401(k) features may include a Roth option or allow for a Solo 401(k) type. The Roth option allows employees to have their contributions deducted after taxes are paid. The Solo 401(k) option allows for the owner, owner and partners, or owners, partners and spouses to implement their own 401(k).

Sure401(k) can provide you with an easy-to-use traditional 401(k), safe harbor 401(k), Solo(k) or 401(k) with a Roth option plan. Calculating retirement savings helps most small business employers and employees decide what plans and contributions are right for them.

For more information on Sure401(k), call 866.497.2028.