401(K) Accounts

401(k) accounts were established by the Revenue Act of 1978. The purpose of 401(k) accounts was to help eligible employees prepare for retirement through tax-deferred employer contributions. 401(k) accounts are also known as cash or deferred arrangements, which means that employees have the option to (a) receive a designated [Page 724]portion of their current salary in cash (in their payroll) or (b) make an elective deferral contribution to the 401(k) plan. The elective deferral contribution is tax deferred, meaning that the earnings are not subject to income taxation until the employee takes a distribution from the plan, which will typically take place at retirement.