The name for the 401(k) plan derives from the tax code section authorizing its use. With a 401(k), participating employees may elect to defer a portion of salary on a pretax basis. The funds can compound in each participant's account without any current tax liability. Upon retirement, distributions of contributions are taxed at ordinary income rates.

To sweeten the pot, the employer may provide matching contributions. By using a safe harbor plan, an employer may provide, on behalf of lower-paid employees, minimum contributions that are equal to 3% of compensation. Alternately, a safe-harbor employer match of 100% on the first 3% of employee deferral, plus 50% on the next 2% of employee deferral can be made. The Act also preempts state laws that might interfere with an automatic-enrollment plan.

The plan must meet various nondiscrimination rules to ensure favorable tax treatment. In addition, the tax law imposes an annual dollar limit on contributions. For example, for the 2008 tax year, the limit is generally $15,500 ($20,500 for a participant age 50 or over).

Under the Pension Protection Act of 2006, various enhancements to a company's 401(k) plan may be available. Consider the following features:

Automatic-enrollment plans: The Act liberalizes several tax rules affecting automatic-enrollment 401(k) plans. Such a plan automatically includes employees as participants unless they affirmatively opt out of participation. The arrangement tends to increase overall participation, which, in turn, may avoid nondiscrimination problems and otherwise benefit higher-paid employees.