Principles of Risk Management and Insurance, 13th Edition

Section 401(K) Plan

Another important defined-contribution plan is a Section 401(k) plan. A Section 401(k) plan is a qualified cash or deferred arrangement (CODA) that allows eligible employees the option of receiving funds as taxable compensation or putting funds into the plan on a tax-deferred basis. Employer contributions are deductible in the year they are made and are not currently taxable as income to plan participants.

A Section 401(k) plan can be a qualified profit-sharing plan, savings or thrift plan, or stock bonus plan. A plan can be established that includes either employer and employee contributions or employee contributions alone.

In a typical plan, both the employer and employees contribute, and the employer matches part or all ...