401(k) Plan

The major benefit to employees is that they are not taxed currently on the portion of compensation that is placed in the plan. An employee has the option of choosing between cash or future benefits on a year-to-year basis. This protects an employee when faced with unexpected immediate financial needs.

A 401(k) plan is a qualified defined contribution plan. This means that an employee can elect to defer allocations. The contributions enjoy tax-free reinvestment of earnings and the opportunity to receive special tax treatment on certain plan distributions.

A 401(k) plan frequently features an "employer matching" provision in which the employer makes a contribution to the plan equal to (a certain percentage of) the employee's contribution. This serves to encourage participation among employees at all levels.

Another major benefit - in addition to the tax deferral - is that a 401(k) plan is often eligible for five-year averaging on distributions. But, if an early distribution is taken, the amount is generally subject to an additional tax.