What type of retirement plan allows employees to defer their salaries without including them in gross income?

The correct answer is C, cash or deferred arrangements. This type of retirement plan enables employees to choose to defer a portion of their salary until a later date, such as retirement. The key feature of cash or deferred arrangements is that the amounts that employees choose to defer are not included in their gross income for tax purposes at the time of deferral. Instead, taxes are paid when the funds are withdrawn during retirement, allowing for potential tax benefits in the present and the growth of investments without immediate taxation.

While other options also relate to retirement savings, they either do not focus specifically on the deferral of salary or have different tax implications. A Roth IRA involves contributions that are made with after-tax income, meaning they are included in gross income at the time of contribution, which contrasts with the concept of deferring salary. A defined benefit plan is based on a predetermined formula that usually considers years of service and salary history to determine benefits, rather than allowing employees to defer their salaries. Finally, a 401(k) plan is a type of cash or deferred arrangement, but the term 'cash or deferred arrangements' encompasses all employer-sponsored plans that offer salary deferral, thus making it a broader answer.