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Experts in Custom Retirement Plan Design & Administration

How Does a 401k Plan Work

A 401k is a qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement on a tax deferred basis. Only an employer is allowed to sponsor a 401k for their employees. You decide how much money you want deducted from your paycheck and deposited to the plan based on limits imposed by plan provisions and IRS rules. Your employer may also choose to make contributions to the plan, but this is optional.

It is the employers (also called the plan sponsor) responsibility to run the plan in accordance with law, rules and regulations, and provisions of the plan itself. This includes deciding who is eligible for the plan, how much and when they can contribute, how much the employer will contribute to the plan, what investment options you will have, how often you can reallocate your investment assets, hiring the vendors necessary to run the plan, and what features the plan will have (will loans be allowed, will hardship withdrawals be allowed, etc.).

It is your responsibility to decide if you want to participate in the 401k, and if so, how much you will contribute each pay period. If you earn $750 each pay period and elect to defer 5% of your pay, $37.50 is taken out of your pay and placed in the 401k plan. These contributions are deductible.

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