408(K) PLAN

A plan set up by an employer to help employees fund their retirement. The 408(k) plan is a simplified version of the popular 401(k) plan but is intended for smaller companies (those with fewer than 25 employees). It is also available to self-employed individuals. Under the plan, employees can contribute pretax dollars to the account and thus reduce their net incomes for the year. This results in a tax savings for the contributor.

Although the term 408(k) is often used to describe an account, it actually refers to the Internal Revenue Code, which details Simplified Employee Pension (SEP) accounts. The employee and the employer contribute to this account in the employee's name. Throughout the account's lifetime, deposits are not treated as income until the funds are withdrawn.