401(k) Traditional Plan Overview

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A traditional 401(k) plan allows employees who are eligible to participate in the plan to make pre-tax elective deferrals through payroll deductions. Employers have the option of making employer contributions on behalf of all participants, making matching contributions based on employees’ deferral contributions, or both. These employer contributions can be immediately vested or they can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time. For more information on vesting requirements, click here.

Contributions under a traditional 401(k) plan must meet specific nondiscrimination requirements. The employer must perform annual tests, known as the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferral contributions and employer matching contributions do not discriminate in favor of highly compensated employees. For more information regarding nondiscrimination testing, click here.