A deferred compensation retirement plan in which an employer withholds a portion of an employee's pretax wages and invests them in a qualified plan; an employer may contribute to an employee's 401(k) plan, e.g. by matching an employee's contributions. Wages invested in a 401(k) plan and income earned therefrom are not taxed until the employee withdraws them from the plan. A 401(k) plan may allow an employee to make a hardship withdrawal, but a distribution received before age 59.5 is generally subject to a 10% early distribution penalty.
Definition from Nolo’s Plain-English Law Dictionary
A deferred compensation retirement savings arrangement in which employers withhold a portion of their employees' pretax wages and invest them in a plan where they may earn income, tax-free, until the employee withdraws the money. Some employers also contribute to their employees' 401(k) plan, often through matching employee contributions, at least up to a certain amount. Because a 401(k) is a retirement plan, employees must pay a penalty for early withdrawals, although some plans allow employees to borrow money from their plans without penalty for certain expenses.
Definition provided by Nolo’s Plain-English Law Dictionary.
August 19, 2010, 5:27 pm