Originally the 401(k) plans were available only to “for profit” corporations, however they are now available, along with similar specialized plans, to certain non profit organizations.

Section 401(k) of the Internal Revenue Code provides the outline for 401(k) plans. Many employers have replaced other pension plans with the 401(k) plans to help their employees upon retirement. With the 401(k) plan, employees elect to contribute a percentage of their income which is matched in contribution by the employer, to some degree. This plan allows the combined contributions of the employee and the employer as well as the investment earnings therein to grow tax deferred, as long as the assets remain in the plan. This means that the employee contributions are not subject to taxation during the time that the contributions are being made. Some refer to this plan as a salary reduction plan that offers good incentive to save for retirement and allows employees to watch their assets grow tax-deferred.

There is also the Simple 401(k) plan wherein employers are required to match employee contribution 100 percent of their investments, up to a certain limit of their total compensation. Or the employer may make contributions without requiring employees contributions but this means the employer must make contributions for all eligible employees whether they wish to participate in the plan or not. Employees who participate in a Simple 401(k) are fully vested in all contributions which are non-forfeitable.

In 2002 the Economic Growth and Tax Reconciliation Act of 2001 enabled an increase up to 25 percent of the employees compensation for plans typically used with the 401(k) making the use of Money Purchase Plans in the future likely to decline. The 401(k) was designed for and considered to be a great benefit for those employees who participate in the plan at the time of retirement.