Definition
An employer retirement plan is a retirement savings plan that is established by an employer to provide retirement income to the employees. These plans come in various forms, each aligning with specific IRS regulations and offering distinct benefits.
Types of Employer Retirement Plans
-
Qualified Pension, Profit-Sharing, Stock Bonus, or Money Purchase Plan
These plans include Keogh plans, designed primarily for the self-employed and small businesses. Each has specific contribution limits and tax advantages. -
Section 401(k) Plan
A popular type of employer-sponsored retirement plan where employees can contribute a portion of their salary on a pre-tax basis. -
Union Plan
Retirement plans managed by labor unions, which often cover multiple employers within an industry. -
Qualified Annuity Plan
Plans that provide for a series of payments at retirement, funded either by the employer or the employees. -
Government Employee Plan
These are plans established for employees of federal, state, or local governments. -
Tax-Sheltered Annuity Plan for Employees of Public Schools
Often referred to as 403(b) plans, these are savings plans for employees of public schools and certain tax-exempt organizations. -
Simplified Employee Pension (SEP) Plan
SEP plans allow employers to make contributions towards their employees’ retirement and their own retirement plans. -
Section 501(c)(18) Trust
These are trusts created by certain tax-exempt organizations for the retirement benefit of their employees.
Examples
- John works for a local government and is covered under a government employee retirement plan.
- Susan is a teacher at a public school and contributes to a 403(b) plan.
- Michael owns a small business and has set up a Simplified Employee Pension (SEP) for his staff.
Frequently Asked Questions (FAQs)
1. Are contributions to employer retirement plans tax-deductible?
Yes, contributions to certain employer-established retirement plans, like 401(k) and SEP plans, are tax-deductible subject to specific IRS limits.
2. Can an employee have both a 401(k) and an IRA?
Yes, an employee can have both a 401(k) plan and an IRA but their eligibility for deducting IRA contributions may be affected by participation in an employer retirement plan.
3. What is the difference between a defined benefit plan and a defined contribution plan?
A defined benefit plan promises a specified monthly benefit at retirement, often based on salary and years of service, while a defined contribution plan specifies the annual contributions towards an individual account.
4. Can employees change their contribution amounts to a 401(k) plan?
Yes, most 401(k) plans allow employees to change their contribution amounts periodically.
5. Are employer contributions to retirement plans guaranteed?
Employer contributions are generally subject to a vesting schedule and may not become the employee’s property until they have met certain service requirements.
Related Terms
- Individual Retirement Account (IRA): A type of retirement savings account that offers tax advantages to individuals.
- 401(k) Plan: A defined contribution plan that allows employees to save for retirement on a pre-tax basis.
- 403(b) Plan: Retirement plans typically for employees of public schools and certain tax-exempt organizations.
- Pension Plan: A type of defined benefit plan where the employer promises to pay a specific monthly amount at retirement.
- Simplified Employee Pension (SEP): An employer-sponsored retirement plan that allows employers to make retirement contributions to traditional IRAs set up for employees.
Online Resources
Suggested Books for Further Studies
- “The Bogleheads’ Guide to Retirement Planning” by Taylor Larimore, Mel Lindauer, Richard A. Ferri, Laura F. Dogu
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “Retirement Planning Handbook” by Harold Evensky
Fundamentals of Employer Retirement Plan: Management Basics Quiz
Thank you for engaging with our comprehensive exploration of employer retirement plans and testing your knowledge with our quiz. Continue to enhance your understanding of retirement planning!