401(k)

A 401(k) plan is a qualified defined contribution plan, so it generally must meet the same requirements as 401(a) and 403(a) plans.

Unlike other qualified plans, however, 401(k) plans let employees make before-tax contributions through a cash or deferred compensation arrangement (CODA). Under a CODA, employees can choose to have compensation that otherwise would have been paid directly to them by their employers deferred to the plan instead. The deferrals are not taxed at the time and continue to accumulate tax free until withdrawn.

Section 401(k) plans can be designed either as pure salary reduction plans, where only before-tax employee contributions, i.e., voluntary deferrals, are made, or as matching plans — where in addition to employee elective deferrals, the employer will match employee contributions (either fully or partly). The plan can also contain employer discretionary contributions, i.e., employer contributions not dependent on employee contributions. These plan designs are also frequently used in the 403(b) plans sponsored by TIAA-CREF participating institutions.

Section 401(k) does not permit two designs that are sometimes part of 403(b) plans. These are:

• Mandatory contributory plans, where employees must contribute as a condition of employment
• Plans that require employees to sign a one-time irrevocable participation agreement when they are first eligible or else be permanently excluded from participation in the plan

Neither design is considered to be a cash or deferred compensation election.