Congress amended the IRS Code to add section 401(k). Work on developing the first plans began in 1979. Originally 401(k) plan was intended for executives but plan proved popular with workers at all levels due to higher contributing limits than the IRA's and it usually cam with a company match and provided greater flexibility. A primary reason for the explosion of 401(k) plans is that such plans are cheaper for employers to maintain than a pension for every retired worker.
401(k) is a employer-sponsored retirement plan available for the people in US. In this plan the employee elects to have a portion of his or her salary deferred or paid directly to the 401(k) account. There are mainly two types of 401(k) plans available:

1. Participant-directed Plans: In this type of plan the employee can select from a number of investment options such as Mutual funds, Stocks, Bonds etc. Employee can invest in any vehicle he wishes. Most of the 401(k) plans today are participant-directed Plans. Many big companies also offer to purchase companies stock as a part of 401(k) plan.

2. Trustee-directed Plans: In this type of 401(k) plan the employer appoints a trustee who decides how the money contributed towards 401(k) will be invested. Employee does not have a say in this type of 401(k) Plan. This Plan is less common now a days and very few companies actually use it.

401(k) Plan is a profit sharing plan (Under IRS definition) with a qualified cash or deferred arrangement. But actual 401(k) plan may not have anything to do with profit sharing as Profit sharing is one of the part of 401(k) plan. Employee contribution can still be made in 401(k).

The Main advantage of 401(k) plan is in case of bankruptcy your 401(k) contribution are protected from creditors. Even if the company for which you have 401(k) plan declares bankruptcy your 401(k) plan is safe. Amount in your 401(k) plan is protected under Employee Retirement Income Security Act of 1974 (ERISA). In 2004 some companies started charging a fee to ex-employees who maintained there 401(k) plan with them. Due to this it is recommended that when you leave a job try to roll over your 401(k) money to either IRA or the new companies 401(k) plan.

Tax consequences and contribution limits:

As with all retirement accounts there is a set limit you can contribute towards your 401(k) plan and there is also a tax benefit associated with them. First I will talk about the Tax benefits in detail.

Here I am not going to discuss

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