A 401(k) plan is a qualified company-sponsored retirement plan. Until funds are withdrawn contributions are not subject to federal and state taxes. A 401(k) plan allows employees to save on a pretax basis and often times employers will contribute matching funds. The employee has the option to choose their level of contribution up to the allowable maximum. In 2007 the limit is $15,500 for contributions and $5,000 for catch-up contributions.

Automatic enrollment

To promote saving for retirement, companies can design plans to make enrollment as easy as possible. 

Employees are automatically enrolled once the eligibility requirements are met. Under automatic enrollment rules, all deferrals withheld from pay will be invested in a fund selected by the employer.

Roth 401(k)

A Roth 401(k) is an elective contribution that will be made on an after-tax rather than before-tax basis. In order for a deferred election to be treated as a Roth contribution the employee must permanently designate it as such.

Roth contributions to a 401(k) Plan must be allocated to a separate account.  In addition, the plan must maintain records of the undistributed amount of Roth contributions made by each employee. 

Roth contributions must meet the same requirements that apply to elective contributions and will be taken into account in performing the actual deferral percentage.

Safe Harbor 401(k) Plan

Under a safe harbor 401(k) Plan, an employer will no longer be required to perform nondiscrimination testing.  This plan must meet certain employer contribution requirements and must provide 100 percent immediate vesting.

Under a safe harbor 401(k) plan, an employer can elect to provide either of the following contributions:

• Dollar for dollar match on elective contributions up to 3 percent and 50 cents on the dollar match on elective contributions between 4 and 5 percent of compensation.

• 3 percent compensation of non-elective contribution to all eligible employees.