Definition
A tax-advantaged employer-sponsored retirement savings plan that allows employees to contribute a portion of their pre-tax or after-tax (Roth) salary, often with an employer matching contribution, governed by the Internal Revenue Code Section 401(k).
UK Context
Best Practices
- Offer employer matching contributions to maximise employee participation and competitive positioning
- Implement automatic enrolment with automatic escalation to increase retirement savings rates
- Conduct annual non-discrimination testing (or adopt a safe harbour plan design) to maintain tax-qualified status
- Provide clear plan communications and financial education to help employees make informed contribution decisions
- Review investment options and plan fees regularly to fulfil fiduciary obligations
Frequently Asked Questions
What is the 401(k) contribution limit?
For 2024, the employee contribution limit is $23,000. Employees aged 50 and older can make an additional $7,500 catch-up contribution. The total combined employer and employee contribution limit is $69,000 ($76,500 with catch-up). These limits are adjusted annually for inflation.
What is a Roth 401(k)?
A Roth 401(k) allows employees to make after-tax contributions. Unlike traditional pre-tax contributions, Roth contributions do not reduce current taxable income, but qualified withdrawals in retirement are completely tax-free, including investment gains.
What is a safe harbour 401(k) plan?
A safe harbour plan is a 401(k) design that exempts the employer from annual non-discrimination testing by providing minimum employer contributions — either a 3% non-elective contribution to all eligible employees or a matching formula of 100% on the first 3% plus 50% on the next 2% of deferrals.