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 Minnesota, 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 on both earnings and contributions is a key feature of the 401(k) plan. Employers may also contribute to the plan by matching a certain percentage of the employee's contributions or by contributing under a profit-sharing feature. When an employee eventually withdraws money from the plan during retirement, those distributions are then subject to income tax. Roth 401(k) contributions are made with after-tax dollars, and qualified distributions from these accounts are generally 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. Minnesota state law does not significantly alter these federal rules for 401(k) plans.