401(k) Plan Definition

Term Definition

401(k) is a defined contribution plan provided by a company to its employees. Based on the options offered in the plan, employees can contribute toward the 401 (k) from their paycheck either before-tax or after-tax. For more information, please consult the Internal Revenue Service (United States Department of Treasury) website.

Extended Definition

401(k) plan enables employees to set aside funds (tax deferred) for use after retirement. The name is derived from the Internal Revenue Code’s subsection 401(k). Based on the type of plan, employee contribution may be matched by the employer up to a certain percentage. In case of plans like safe harbor 401(k) and SIMPLE 401(k), employer contribution is mandatory. Taking a distribution of the saved funds before the specified age can result in penalty tax. The Internal Revenue Service (IRS), the government agency responsible for the enforcement and administration of the revenue laws of the Treasury Department, provides employers detailed information about 401(k).

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