Which type of compensation plan allows tax-deferred contributions to the employee?

The correct answer is 401(k) Plans because they allow employees to make contributions from their pre-tax income, which means that taxes on those contributions and the investment earnings are deferred until withdrawal, typically during retirement. This feature makes 401(k) Plans an attractive option for employees looking to save for retirement while also reducing their current taxable income.

The contributions to a 401(k) are made before federal (and often state) taxes are calculated, providing immediate tax benefits. Furthermore, the growth of investments within the 401(k) account is also tax-deferred, meaning that employees do not pay taxes on gains until they begin to withdraw funds, generally after reaching age 59½. This tax deferral can lead to significant long-term savings compared to contributing to an account that does not have such a benefit.

In contrast, while 403(b) Plans and IRAs also offer tax-deferred contributions, the specifics and limits can differ, making 401(k) Plans the most recognized option in the question regarding broad workplace compensation plans. Pension Plans, while providing a source of retirement income, typically are funded by the employer rather than through employee contributions, further distinguishing them from the directed employee contributions characteristic of 401(k) Plans.