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).
US Context
401(k) plans are governed by federal law (ERISA and the Internal Revenue Code) and regulated by the DOL and IRS. The SECURE 2.0 Act of 2022 mandated automatic enrolment for new 401(k) plans at a minimum 3% deferral rate with annual 1% escalation. As of 2025, many provisions are phasing in including expanded catch-up limits for ages 60-63. Employers typically engage third-party administrators and recordkeepers to manage plan operations. Fiduciary liability is a significant concern.
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.