401(k) plans have become a widely accepted retirement
savings vehicle for small businesses. According to the
most recent data, an estimated 51 million U.S. workers
participate in 401(k) plans that have total assets of about
$3 trillion.
With a 401(k) plan, employees can choose to defer
a portion of their salary. So instead of receiving that
amount in their paycheck today, the employees can
contribute the amount into a 401(k) plan sponsored
by their employer. These deferrals are accounted
separately for each employee. Deferrals are made on
a pretax basis but, if the plan allows, they can be made
on an after-tax (Roth) basis at the employee’s choosing.
Many 401(k) plans provide for employer matching or
other contributions. The Federal Government and most
state governments do not tax employer contributions
and pretax deferrals (plus earnings) until distributed.
Like most profit sharing plans, 401(k) plans can vary
significantly in their complexity. However, many
financial institutions and other organizations offer
prototype 401(k) plans, which can greatly lessen the
administrative burden of establishing and maintaining
these plans.