A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Some of the key features of 401k plans are:

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).

• Employers can contribute to employees’ accounts.

• Distributions—including earnings—are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

In Colorado, as in other states, a 401(k) plan is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. The contributions made by employees towards their 401(k) are not taxed until the employee withdraws that money, typically after retirement. Employers have the option to make contributions to their employees' 401(k) accounts, which can be matched up to a certain percentage; these contributions can be subject to vesting requirements. The earnings in a 401(k) plan are also tax-deferred until withdrawal. If the plan allows for Roth 401(k) contributions, these are made with after-tax dollars, and qualified distributions are tax-free. The specific rules and regulations governing 401(k) plans are established by federal law under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, rather than state law. However, state law may affect aspects of 401(k) plan administration, such as creditor protection. It's important for employees to understand the rules regarding contributions, matching, vesting, and distributions to effectively plan for retirement.