What do employers need to consider regarding retirement
savings and 401(k) plans? One of the most popular and widely offered retirement
plan options is the cash-or-deferred arrangement (CODA), commonly known as
a 401(k) plan, after the section of the Internal Revenue Code (IRC) that authorizes
them. A CODA is a special type of defined contribution plan under which an
eligible employee can elect to have the employer defer part of his or her
salary and contribute the deferred amount to the plan or receive the full
amount of the salary as cash. If an employee chooses to defer compensation,
it is not subject to income taxation until it is withdrawn from the plan.
The advent of the 401(k) plan began a major shift
in the way Americans plan and save for retirement. The days of relying on
traditional employer-provided pension plans as the primary source of retirement
income are fast becoming extinct. In their place are 401(k) plans in which
employees can save for retirement on a pretax basis, and employers can better
control their retirement costs because there are no minimum funding levels
or guaranteed retirement benefits.
Other employer-sponsored retirement plans that are
similar to but simpler to administer than 401(k) plans include simplified
employee pensions (SEPs) and SIMPLE Plans. These plans have specified minimum
requirements and offer less design flexibility in return for simple administration.
Additionally, educational institutions and nonprofit organizations may provide
403(b) plans for their employees. Government employers may sponsor 457 plans.
These plans have many of the same features and restrictions as 401(k) plans.
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