What is a 401(k) Plan?
The Basics
A 401(k) plan is a type of defined-contribution retirement plan, which means it is funded based on a specific formula, usually involving contributions from your employer. Unlike defined-benefit (i.e., traditional pension) plans that promise a set payout upon retirement, defined-contribution plans depend on how much money is contributed and how well those contributions are invested. Employers may offer matching contributions up to a certain percentage of your salary, but the responsibility for funding and investment risk largely rests with you.
Contributions
One of the defining features of a 401(k) plan is its “cash or deferred arrangement” (CODA). A CODA allows you to defer a portion of your salary into your retirement account rather than receiving that amount as immediate income. For 2025, the IRS permits you to contribute up to $23,500 in salary deferrals. These contributions grow tax-deferred, meaning you won't pay taxes on the money until you withdraw it, unless your plan allows, and you choose to make, post-tax (Roth) contributions.
Pre-tax contributions reduce your taxable income for the year in which they are made, while Roth contributions are taxed upfront but grow tax-free and can be withdrawn tax-free in retirement, provided certain conditions are met. This flexibility allows you to choose the tax strategy that best fits your financial goals and circumstances.
Automatic Enrollment
Some 401(k) plans include automatic enrollment, particularly if the plan was established or amended after certain dates set by federal law. This means that new employees are automatically enrolled in the plan and begin contributing a portion of their salary unless they actively choose to opt out. Automatic enrollment aims to increase participation rates and encourage long-term saving for retirement.
Your Plan May Differ
Each 401(k) plan has its own specific rules and terms, which may include features such as loaning money against your retirement account or the option to take certain hardship withdrawals without penalty. Additionally, employer contributions may be subject to a vesting schedule, which means you must remain employed for a set number of years before those funds fully belong to you. However, your own contributions are always 100% vested. To understand the details of your specific 401(k) plan, you can request the official plan document from your employer.
If you believe. you have been denied retirement benefits from your 401(k) plan, or if your 401(k) plan is being mismanaged, you should seek legal counsel.
Angulo Law, A.P.C. is dedicated to assisting participants of employee benefit plans.
