Small Business Glossary and Definitions

A 401(k) plan is a retirement savings plan created in 1978 and named after a specific section of U.S. Tax Code. It has become the country’s most widely used employer-sponsored retirement savings plan. Millions of employees rely upon the money in these plans to fund their retirement income. Many companies also use the plans to distribute company stock to workers.

The plans are fairly flexible compared to many other retirement income instruments. Several variations of the original plan have been created, such as the “safe-harbor 401(k) and the SIMPLE 401(k).

An employee with a 401(k) plan defers part of his annual income to a savings account. Sometimes this amount is matched by employer, to varying degrees. This money usually is tax-free until the employee withdraws it. (Mandatory minimum withdrawals are required after age 70 1/2.) A 401(k) plan is a “qualified retirement plan,” so it falls under the Employee Retirement Income Security Act of 1974 as well as the U.S. Tax Code.