401(k) plans can be a powerful tool to promote financial security in retirement. They provide a host of benefits for employers, including aiding in hiring and retention, tax-advantaged contributions and the ability to include all employees, owners and managers. Employees also enjoy advantages such as flexibility with contributions and investment options, tax-free contributions and earnings, and often portability if they leave the company.
- Traditional 401(k) plans offer the most flexibility. Employers have discretion over whether to make contributions on behalf of all participants, to match employees’ deferrals, or to do both. Annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers.
- Safe harbor 401(k) plans include several kinds of 401(k) plans that aren't subject to the annual benefits testing required with traditional 401(k) plans. However, employees in these plans must receive a certain level of employer contributions.