F.48.3 401(k) Plan Features

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

H.65 Client and Planner Attitudes, Values, Biases H.65.1 Money Scripts and Money Attitudes H.65.2 Planner Self-Awareness H.66 Behavioral Finance H.66.1 Cognitive Biases H.66.2 Emotional Biases H.66.3 Heuristics and Mental Accounting H.67 Sources of Money Conflict H.67.1 Couples and Money Conflict H.67.2 Family and Intergenerational Money Conflict H.68 Principles of Counseling H.68.1 Therapeutic Techniques in Financial Planning H.68.2 Professional Boundaries and Referrals H.69 General Principles of Effective Communication H.69.1 Listening and Questioning Skills H.69.2 Managing Difficult Conversations H.69.3 Non-Verbal Communication H.70 Crisis Events with Severe Consequences H.70.1 Death and Divorce H.70.2 Job Loss and Health Crisis H.70.3 Sudden Wealth and Sudden Loss H.70.4 Natural Disasters and Traumatic Events

F.48.3 401(k) Plan Features

Key Takeaways Explain This Topic AI

Pre-tax 401(k) deferrals reduce current taxable income; Roth 401(k) provides tax-free qualified distributions

ADP test limits HCE deferrals based on NHCE participation: if NHCEs defer 2%, HCEs can defer 4%; if NHCEs defer 6%, HCEs can defer 8%

Safe harbor 401(k) requires either 3% non-elective contribution to all OR 100% match on first 3% plus 50% on next 2% of deferrals

QACA allows 3-month delayed safe harbor with 90-day auto-enrollment and 2-year cliff vesting on employer contributions

Plan loans limited to lesser of $50,000 or 50% of vested balance; hardship withdrawals require immediate and heavy financial need

Last updated: October 2026

401(k) Plan Features

A 401(k) plan is a Cash or Deferred Arrangement (CODA) that attaches to a profit sharing or stock bonus plan. It is the most prevalent type of employer-sponsored retirement plan today, predominantly funded through employee elective deferrals with optional employer matching contributions. Understanding 401(k) features, testing requirements, and distribution rules is critical for CFP exam success.

Salary Deferrals: Pre-Tax vs. Roth

Employees can defer compensation to a 401(k) on either a pre-tax or Roth (after-tax) basis, depending on plan design.

Pre-Tax Deferrals (Traditional 401(k))

• Feature Details
• Tax treatment at contribution Reduces current taxable income
• Tax treatment at distribution Taxed as ordinary income
• Required minimum distributions Required beginning at age 73
• Best for Those expecting lower tax rates in retirement
• Roth 401(k) Deferrals

• Feature Details
• Tax treatment at contribution No current tax deduction (after-tax)
• Tax treatment at distribution Tax-free if qualified
• Qualified distribution requirements 5 years from first Roth contribution AND age 59 1/2, death, or disability
• Required minimum distributions No longer required (SECURE 2.0, effective 2024)
• Best for Those expecting higher tax rates in retirement

Key Difference: Unlike Roth IRAs, Roth 401(k)s have no income limits for contributions. Any employee can make Roth 401(k) deferrals regardless of income.

Employer Matching Contributions

Employer matching contributions incentivize employee participation and increase overall savings rates. Common matching formulas include:

Common Matching Formulas

• Formula Type Example Employee Defers 6% on $100,000
• Dollar-for-dollar up to X% 100% match up to 3% $3,000 match
• Partial match 50% match up to 6% $3,000 match
• Tiered match 100% on first 3%, 50% on next 2% $4,000 match
• Discretionary Varies year to year Based on company decision

Vesting: Employee deferrals are always 100% vested immediately. Employer matching contributions may vest according to a schedule:

• 2-6 year graded : 0%, 20%, 40%, 60%, 80%, 100%
• 3-year cliff : 0% until year 3, then 100%
• ADP/ACP Testing: Ensuring Nondiscrimination

Traditional 401(k) plans must pass nondiscrimination tests annually to ensure that Highly Compensated Employees (HCEs) do not disproportionately benefit compared to Non-Highly Compensated Employees (NHCEs).

Highly Compensated Employee (HCE) Definition (2026)

An employee is an HCE if:

• >5% owner at any time during the current or prior year, OR
• Compensation exceeded $160,000 in the prior year (with optional top 20% election)
• The Actual Deferral Percentage (ADP) Test

The ADP test limits elective deferrals of HCEs based on the average deferral percentage of NHCEs.

ADP Test Formula:

If NHCE ADP is... Maximum HCE ADP is...

• 0% to 2% 2 x NHCE ADP
• 2% to 8% NHCE ADP + 2%
• Over 8% 1.25 x NHCE ADP

ADP Test Examples:

• NHCE Average Deferral Maximum HCE Deferral Calculation
• 1% 2% 1% x 2 = 2%
• 2% 4% 2% x 2 = 4%
• 3% 5% 3% + 2% = 5%
• 5% 7% 5% + 2% = 7%
• 8% 10% 8% + 2% = 10%
• 10% 12.5% 10% x 1.25 = 12.5%
• The Actual Contribution Percentage (ACP) Test

The ACP test applies to:

• Employee after-tax contributions (thrift contributions)
• Employer matching contributions

The ACP test uses the same scale as the ADP test .

Correcting Failed ADP/ACP Tests

If a plan fails, corrections must be made by March 15 (2.5 months after plan year end) to avoid a 10% excise tax:

• Correction Method Effect
• Corrective distributions Return excess contributions to HCEs (reduces HCE percentage)
• Recharacterization Change pre-tax to after-tax contributions (reduces ADP but increases ACP)

QNECs (Qualified Non-Elective Contributions) Employer contributes to all eligible NHCEs (increases NHCE percentage)

QMACs (Qualified Matching Contributions) Employer adds match only for deferring NHCEs (increases NHCE percentage)

Safe Harbor 401(k) Plans

Safe harbor 401(k) plans are exempt from ADP and ACP testing when specific contribution and notice requirements are met.

Safe Harbor Contribution Options

• Safe Harbor Type Required Employer Contribution Vesting
• Non-Elective 3% of compensation to ALL eligible employees 100% immediate
• Basic Match 100% on first 3% + 50% on next 2% of deferrals 100% immediate
• Enhanced Match At least as generous as basic match 100% immediate

Safe Harbor Basic Match Calculation:

Employee earning $100,000 who defers 5%:

• Match on first 3%: 100% x $3,000 = $3,000
• Match on next 2%: 50% x $2,000 = $1,000
• Total match: $4,000 (4% of compensation)

Key Point: Safe harbor contributions must be 100% vested immediately. No graded or cliff vesting is permitted on safe harbor amounts.

Notice Requirement

Employers must provide eligible employees with written notice at least 30 days (and no more than 90 days) before the beginning of each plan year describing safe harbor contribution formula and other plan features.

QACA: Qualified Automatic Contribution Arrangement

A QACA combines automatic enrollment with safe harbor provisions for a modified ADP/ACP testing exemption.

QACA Requirements

• Feature Requirement
• Automatic enrollment Default deferral of at least 3%, escalating annually by 1% to at least 10% (15% max cap)
• Employer contribution Basic safe harbor match OR 3% non-elective
• Vesting 2-year cliff (not immediate)
• Withdrawals Participants may withdraw auto-enrolled amounts within 90 days
• Notice 30-90 days before plan year

QACA Advantage: Unlike standard safe harbor, QACA allows 2-year cliff vesting on employer contributions rather than requiring immediate vesting.

Catch-Up Contributions

Participants age 50 or older by year-end may make additional catch-up contributions beyond the standard deferral limit.

2026 Catch-Up Limits

• Age Standard Deferral Catch-Up Total
• Under 50 $24,500 $0 $24,500
• 50-59 $24,500 $8,000 $32,500
• 60-63 $24,500 $11,250 $35,750
• 64+ $24,500 $8,000 $32,500

Catch-up contributions do NOT count toward the $72,000 annual additions limit.

In-Plan Roth Conversions

Many 401(k) plans permit in-plan Roth conversions , allowing participants to convert pre-tax amounts to Roth within the same plan.

In-Plan Roth Conversion Rules

• Feature Details
• Availability Plan sponsor must elect to offer this feature
• Amount No dollar limit on conversion amount
• Age restriction Can be done at any age
• Tax treatment Converted amount is taxable as ordinary income in year of conversion
• 10% penalty Does not apply to conversions (even under age 59 1/2)
• 5-year rule Converted amounts subject to their own 5-year holding period for penalty-free withdrawal

Strategic Use: In-plan conversions allow participants to convert at lower tax rates (e.g., after job loss or early retirement) while keeping funds in the plan's protected environment.

Hardship Withdrawals

Participants may take hardship withdrawals from their 401(k) if the plan permits and they have an immediate and heavy financial need.

Immediate and Heavy Financial Need (Safe Harbor Events)

• Qualifying Event
• Medical expenses for participant, spouse, or dependents
• Purchase of primary residence (down payment)
• Tuition and educational expenses for next 12 months
• Prevention of eviction or mortgage foreclosure
• Funeral and burial expenses
• Repair of damage to principal residence
• Hardship Withdrawal Rules

• Feature Requirement
• Amount Limited to amount necessary to satisfy need
• Source May include deferrals, but plan may restrict to contributions only (not earnings)
• Repayment Cannot be repaid or rolled over
• Taxes Subject to ordinary income tax
• Penalty 10% early withdrawal penalty applies unless exception met
• Loan first IRS no longer requires taking loans before hardship
• SECURE 2.0 Emergency Withdrawals

SECURE 2.0 created new penalty-free withdrawal options:

• Type Amount Penalty
• Emergency personal expense Up to $1,000/year 10% penalty waived
• Domestic abuse victims Lesser of $10,500 (2026) or 50% vested balance 10% penalty waived
• Disaster relief Up to $22,000 per disaster 10% penalty waived
• Plan Loans

401(k) plans may permit participants to borrow from their vested account balance.

Loan Limits

The maximum loan is the lesser of :

• $50,000 , OR
• 50% of the participant's vested account balance

Reduced by: Highest outstanding loan balance in the prior 12 months.

Exception: If vested balance is under $20,000, the maximum loan is the lesser of:

• $10,000, OR
• The vested account balance
• Loan Repayment Requirements

• Requirement Details
• Term Generally 5 years maximum
• Exception Up to 15-30 years if used to purchase principal residence
• Payments Substantially level amortization, at least quarterly
• Interest rate Reasonable rate (typically prime + 1%)
• Termination Loan generally becomes due upon termination of employment
• Default Unpaid balance becomes taxable distribution + 10% penalty if under 59 1/2
• Loan Repayment After Termination (TCJA 2017)

If an employee terminates with an outstanding loan, they may rollover/repay the loan by the tax filing deadline (including extensions) to avoid the distribution being taxable.

On the CFP Exam

Expect questions on:

• Calculating ADP/ACP test limits using the tiered formula
• Understanding safe harbor contribution requirements (3% non-elective OR 100%/50% match)
• Distinguishing pre-tax vs. Roth 401(k) taxation and distribution rules
• Applying plan loan limits ($50,000 or 50% of vested balance)
• Identifying hardship withdrawal qualifying events and consequences