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 Maine, 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 a 401(k) are not taxed until the employee withdraws that money, typically after retirement. This deferral of taxes is a key feature of the 401(k) plan, which can result in significant tax savings. Employers may also contribute to the plan, which can be either matching the employee's contribution up to a certain percentage or a non-elective contribution. The state of Maine follows the federal guidelines for 401(k) plans, which are established under the Employee Retirement Income Security Act (ERISA) and regulated by the Internal Revenue Service (IRS). Upon retirement or when the employee becomes eligible for distributions, the money from a traditional 401(k) account is taxed as ordinary income. However, distributions from a Roth 401(k) account, which are made with after-tax dollars, may be tax-free if certain conditions are met.