An employer may choose to have a stand-alone 401(k) plan or a profit-sharing plan with a 401(k) feature. A 401(k) plan is a qualified plan that allows employees to defer receiving compensation in order to have the amount contributed to the plan. This arrangement is commonly referred to as cash or deferred arrangement (CODA). Contributions deferred by employees are referred to as elective deferrals, which are typically made to the 401(k) plan on a pre-tax basis.

The employer may also choose to make matching, non-elective or profit-sharing contributions to the plan. A 401(k) plan is suited for an employer who wants employees to assist with funding the plan.