The most popular defined contribution plan today is the
401(k) plan. More formally called a cash or deferred arrangement (CODA), the 401(k) is simply a feature added to a profit sharing plan that, as described in Section 401(k) of the Internal Revenue Code, allows plan participants to elect to defer a portion of their income to a qualified retirement plan on a pre-tax basis. The employer has considerable flexibility in its contribution commitment, though most plans include a matching-dollar contribution provision.
Besides being attractive to employers, the 401(k) is popular with employees for a variety of reasons, including:
- The convenience of payroll deduction;
- Current tax savings realized through pre-tax contributions;
- Wide variety of investment options to which participants can allocate contributions;
- Easy portability; and
- Allows for employer contributions.
Businessowners can elect to make matching tax-deductible contributions on behalf of participating employees. Depending on the type of 401(k) plan design adopted, employer contributions may be discretionary or required.
