A 401(k) is an employer-sponsored retirement plan, sometimes called a defined contribution plan (in contrast to a defined benefit pension plan). It allows employees to make pre-tax contributions to the plan, up to a specified amount each year. Employers may also make contributions; most employers choose to match up to a certain percentage of employee contributions. The plan gets its name from Section 401(k) of the Internal Revenue Code.
In order to receive tax benefits for employers and employees, 401(k) plans must be "qualified," that is, they must meet certain requirements set out by the IRS. Qualified 401(k) plans are also a tax advantage to the employer, because the cost of setting up and administering the plan is a deductible business expense, as are the employer contributions made to the plan. One variation of the 401(k) is a Safe Harbor 401(k).
