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 placed in the plan’s retirement trust in a plan account for each participant.


  • Allows employees an easy way to save for their retirement
  • Can be combined with or amended to include Employer contributions
  • Still provide the Employer with ability to contribute on a discretionary basis


  • Depending on the investment arrangement used, the plan’s administrative costs can be significantly larger than other plan types
  • Subject to substantial compliance testing to show that benefits do not favor the higher paid employees

401(k) plans have become a widely accepted retirement savings vehicle for small businesses. Currently, more than 15 percent of the US population contributes to employer sponsored 401(k) plans and, as a group, they hold several trillion dollars in retirement plan assets.

An employees’ deferral can be made on either a Pre-Tax or Roth (after-tax) basis as directed by the employee.  In addition to the Roth option, 401(k) plans can also offer Employee After Tax contributions which, if the plan allows, can later be converted to Roth salary deferral contributions.

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.  Most Employers hire a Third Party Administrator for their 401(k) Plans to help reduce the administrative burden

If you establish a 401(k) Plan, the Employer:

  • Can be a business of any size
  • May have additional retirement plans if it so chooses
  • Must create a governing plan document
  • Must decide whether the employees will be allowed to invest their funds or if they will be professionally managed
  • Decide if it wants to contribute along with the employees
  • May need to file a form in the IRS Form 5500 Series


Who contributes

Employees contribute through a salary deferral feature.   The plan may be set up to allow for additional employer Profit Sharing contributions.


Contribution limits

Employees may contribute the lesser of 100% of compensation or $18,500 (for 2018, subject to cost-of-living adjustments for later years).  Employees aged 50 years and over may contribute an additional “catch-up contribution” of $6,000