A 401(k) is a qualified retirement plan. Qualified retirement plans must satisfy IRS requirements for both setup and operations. They fall into two categories: defined contribution and defined benefit.

In a defined benefit plan, the employer has committed to providing the employee with a specific payout, regardless of the performance of the employer's investments. An example of a defined benefit plan is a pension. A defined benefit plan puts the burden of generating the assets due to the employee at retirement firmly upon the employer.

In a defined contribution plan, the onus is upon the employee to contribute enough to the retirement plan to ensure enough assets at retirement. The most common defined contribution plans are the 401(k), 403(b) and IRA.

Regardless of the type of defined contribution account, there are a number of restrictions placed upon the account. These restrictions include the type of investments that may be made, with mutual funds and money market accounts being the most common. Other restrictions concern when the funds can be released without penalty.

Generally speaking, any withdrawals of funds prior to age 59.5 must meet strict IRS requirements and are subject to a penalty of a 10% excise tax on top of income tax. Some employers allow for short-term loans with regular payments and interest that are paid back to the account, but it is not a requirement of a 401(k) for an employer to permit this type of loan. 401(k) plans require that the account holder begin distributing funds from his or her account once he or she reaches the age of 70.5 years.

(For related reading, see "401(k) and Qualified Plans.")