Employer retirement plans overview

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This overview is intended to introduce basic concepts, not provide guidance. Retirement plans are complex and contain many subtleties not described here. There can be penalties if plan withdrawal or contribution limitations are not followed correctly. Please don't hesitate to ask questions in the Bogleheads forum.


Employer retirement plans overview describes retirement plans offered by employers. For individual retirement plans, see Retirement planning. US government employees should see Thrift Savings Plan.

Employer retirement plan defined

A pension plan is an employee benefit plan established or maintained by an employer or by an employee organization (such as a union), or both, that provides retirement income or defers income until termination of covered employment or beyond. There are a number of types of retirement plans, including the 401(k) plan and the traditional pension plan, known as a defined benefit plan.

Most private sector pension plans are covered by the Employee Retirement Income Security Act (ERISA). Among other things, ERISA provides protections for participants and beneficiaries in employee benefit plans, including providing access to plan information. Also, those individuals who manage plans (and other fiduciaries) must meet certain standards of conduct under the fiduciary responsibilities specified in the law.[1]

Implementing an employer retirement plan requires consideration of many factors that affect both the employer and employee. Plan complexity is demonstrated by the fact that the IRS maintains a web site dedicated to nothing more than correcting retirement plans.

Qualified retirement plan

A qualified retirement plan meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act (ERISA) and therefore qualifies for favorable tax treatment. Contributions and earnings are tax-deferred until withdrawn.

The Employee Retirement Income Security Act (ERISA) covers two types of pension plans: defined benefit plans and defined contribution plans.[1]

IRA-based plans (qualified)

IRAs are not limited to individuals. An employer can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.[2]

IRA-Based Plans[2]
Payroll Deduction IRA SEP Simple IRA Plan
Key Advantage Easy to set up and maintain. Easy to set up and maintain. Salary reduction plan with little administrative paperwork.
Employer Eligibility Any employer with one or more employees. Any employer with one or more employees. Any employer with 100 or fewer employees that does not currently maintain another retirement plan.
Employer's Role Arrange for employees to make payroll deduction contributions. Transmit contributions for employees to IRA. No annual filing requirement for employer. May use IRS Form 5305-SEP to set up the plan. No annual filing requirement for employer. May use IRS Forms 5304-SIMPLE or 5305-SIMPLE to set up the plan. No annual filing requirement for employer. Bank or financial institution handles most of the paperwork.
Contributors to the Plan Employee contributions remitted through payroll deduction. Employer contributions only. Employee salary reduction contributions and employer contributions.
Maximum Annual Contribution (per participant)
See www.irs.gov/retirement for annual updates.
$5,000 for 2012 and $5,500 for 2013. Participants age 50 or over can make additional contributions up to $1,000. Up to 25% of compensation1 but no more than $50,000 for 2012 and $51,000 for 2013. Employee:$11,500 in 2012 and $12,000 in 2013. Participants age 50 or over can make additional contributions up to $2,500..

Employer:Either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.); or contribute 2% of each eligible employee's compensation.2

Contributor's Options Employee can decide how much to contribute at any time. Employer can decide whether to make contributions year-to-year. Employee can decide how much to contribute. Employer must make matching contributions or contribute 2% of each employee's compensation.
Minimum Employee Coverage Requirements There is no requirement. Can be made available to any employee. Must be offered to all employees who are at least 21 years of age, employed by the employer for 3 of the last 5 years and had compensation of $550 for 2012 and for 2013. Must be offered to all employees who have earned income of at least $5,000 in any prior 2 years, and are reasonably expected to earn at least $5,000 in the current year.
Withdrawals, Loans and Payments Withdrawals permitted anytime subject to federal income taxes; early withdrawals subject to an additional tax (special rules apply to Roth IRAs). Withdrawals permitted anytime subject to federal income taxes, early withdrawals subject to an additional tax. Withdrawals permitted anytime subject to federal income taxes, early withdrawals subject to an additional tax.
Vesting Contributions are immediately 100% vested. Contributions are immediately 100% vested. Employee salary reduction contributions and employer contributions are immediately 100% vested.
1. Maximum compensation on which 2012 contributions can be based is $250,000 ($255,000 for 2013).

2. Maximum compensation on which 2012 employer 2% non-elective contributions can be based is $250,000 ($255,000 for 2013).

Payroll deduction IRA

(Employer perspective) This is probably the simplest retirement arrangement that a business can have. It is so easy that, in fact, no plan document is needed under this arrangement.[Comments 1]

Under a Payroll Deduction IRA, an employee establishes an IRA (either a Traditional IRA or a Roth IRA) with a financial institution. The employee then authorizes a payroll deduction amount for the IRA.

SARSEP

(Employer perspective) A Salary Reduction Simplified Employee Pension plan (SARSEP) is a Simplified Employee Pension (SEP) plan set up before 1997 that permits contributions to be made through employee salary reductions, referred to as “employee elective deferrals.” Under a SARSEP, employees and employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for the employees, subject to certain percentage-of-pay and dollar limits.

Employees can play an active role in funding for their retirement by choosing to have the employer contribute part of their pay to their separate IRAs, referred to as SEP-IRAs. SEP-IRAs need to be established for each participant, even those becoming eligible after December 31, 1996, with a bank, insurance company or other qualified financial institution.

No new SARSEPs can be established after December 31, 1996. However, employers who established SARSEPs prior to January 1, 1997, can continue to maintain them and new employees of the employers hired after December 31, 1996, can participate in the existing SARSEP.

SEP

(Employer perspective) A SEP is a Simplified Employee Pension plan. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SEP, employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self –employed individuals), subject to certain limits.

IRS Code Section 408(k) (26 U.S.C. 408 - Individual retirement accounts) contains language as clear as it gets when it comes to pensions. And it will answer many questions.[3]

SIMPLE IRA

(Employer perspective) A SIMPLE IRA plan is a Savings Incentive Match PLan for Employees. Because this is a simplified plan, the administrative costs should be lower than for other, more complex plans. Under a SIMPLE IRA plan, employees and employers make contributions to traditional Individual Retirement Arrangements (IRAs) set up for employees (including self-employed individuals), subject to certain limits. It is ideally suited as a start-up retirement savings plan for small employers who do not currently sponsor a retirement plan.

IRS Code Section 408(p) (26 U.S.C. 408 - Individual retirement accounts) is worded somewhat more ambiguously than 408(k). Use Notice 98-4 as a resource in Q & A format.[3]

Defined benefit plan (qualified)

A defined benefit pension plan is the most administratively complex type of retirement plan. It may be used by businesses of any size. Employers can generally contribute more to a defined benefit plan than to other types of retirement plans.

This fund is different from many pension funds where payouts are somewhat dependent on the return of the invested funds. Therefore, employers will need to dip into the companies earnings in the event that the returns from the investments devoted to funding the employee's retirement result in a funding shortfall. The payouts made to retiring employees participating in defined-benefit plans are determined by more personalized factors, like length of employment.

The most common type of monthly benefit is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending on investment returns. It is 'defined' in the sense that the formula for computing the employer's contribution is known in advance.

In a Defined Benefit plan, more precision ("definition") occurs for the plan's output, i.e. the "benefit." Less precision is available to the employer concerning the input, i.e. the "contribution." If plan investments lose money, employer is on the hook to restore the trust to the amount that's actuarially needed to be on track to fund the stated benefit.[3]

On the other hand, a Defined Contribution plan ( below) gives employer more control over what goes in, and what comes out ("benefit") is more a function of investment performance.

Defined Benefit Plans[2]
Key Advantage Provides a fixed, pre-established benefit for employees.
Employer Eligibility Any employer with one or more employees.
Employer's Role No model form to establish this plan. Advice from a financial institution or employee benefit adviser would be necessary. Must file annual Form 5500. An actuary must determine annual contributions.
Contributors to the Plan Primarily funded by employer.
Maximum Annual Contribution (per participant)
See www.irs.gov/retirement for annual updates.
Annually determined contribution.
Contributor's Options Employer generally required to make contribution as set by plan terms.
Minimum Employee Coverage Requirements Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.
Withdrawals, Loans and Payments Payment of benefits after a specified event occurs (e.g. retirement, plan termination, etc.). Plan may permit loans; early withdrawals subject to an additional tax.
Vesting May vest over time according to plan terms.

Traditional pension

A defined benefit pension plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1% of pay per year of service x avg salary for the 5 highest years, as of plan's normal retirement age.[3]

The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).[1]

Cash balance plan

A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).[1]

Defined contribution plan (qualified)

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.

Defined Contribution Plans[2]
Profit Sharing Safe Harbor 401(k) Automatic Enrollment 401(k) Traditional 401(k)
Key Advantage Permits employer to make large contributions for employees. Permits high level of salary deferrals by employees without annual nondiscrimination testing. Provides high level of participation and permits high level of salary deferrals by employees. Also safe harbor relief for default investments. Permits high level of salary deferrals by employees.
Employer Eligibility Any employer with one or more employees. Any employer with one or more employees. Any employer with one or more employees. Any employer with one or more employees.
Employer's Role No model form to establish this plan. May need advice from a financial institution or employee benefit adviser. A minimum amount of employer contributions is required. Must file annual Form 5500. No model form to establish this plan. May need advice from a financial institution or employee benefit adviser. A minimum amount of employer contributions is required. Must file annual Form 5500. No model form to establish this plan. May need advice from a financial institution or employee benefit adviser. Must file annual Form 5500. May require annual nondiscrimination testing to ensure that plan does not discriminate in favor of highly compensated employees. No model form to establish this plan. May need advice from a financial institution or employee benefit adviser. Must file annual Form 5500. Requires annual nondiscrimination testing to ensure that plan does not discriminate in favor of highly compensated employees.
Contributors to the Plan Annual employer contribution is discretionary. Employee salary reduction contributions and employer contributions. Employee salary reduction contributions and maybe employer contributions. Employee salary reduction contributions and maybe employer contributions.
Maximum Annual Contribution (per participant)
See www.irs.gov/retirement for annual updates.
Up to the lesser of 100% of compensation1 or $50,000 for 2012 and $51,000 for 2013.
Employer can deduct amounts that do not exceed 25% of aggregate compensation for all participants.2
Employee: $17,000 in 2012 and $17,500 in 2013. Participants age 50 or over can make additional contributions up to $5,500.

Employer/Employee Combined: Up to the lesser of 100% of compensation1 or $50,000 for 2012 and $51,000 for 2013. Employer can deduct (1) amounts that do not exceed 25% of aggregate compensation for all participants, and (2) all salary reduction contributions.2
Employee: $17,000 in 2012 and $17,500 in 2013. Participants age 50 or over can make additional contributions up to $5,500.

Employer/Employee Combined: Up to the lesser of 100% of compensation1 or $50,000 for 2012 and $51,000 for 2013. Employer can deduct (1) amounts that do not exceed 25% of aggregate compensation for all participants, and (2) all salary reduction contributions.2
Employee: $17,000 in 2012 and $17,500 in 2013. Participants age 50 or over can make additional contributions up to $5,500.

Employer/Employee Combined: Up to the lesser of 100% of compensation1 or $50,000 for 2012 and $51,000 for 2013. Employer can deduct (1) amounts that do not exceed 25% of aggregate compensation for all participants, and (2) all salary reduction contributions.2
Contributor's Options Employer makes contribution as set by plan terms. Employee can decide how much to contribute based on a salary reduction agreement. The employer must make either specified matching contributions or a 3% contribution to all participants. Employees, unless they opt otherwise, must make salary reduction contributions specified by the employer. The employer can make additional contributions, including matching contributions as set by plan terms. Employee can decide how much to contribute based on a salary reduction agreement. The employer can make additional contributions, including matching contributions as set by plan terms.
Minimum Employee Coverage Requirements Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.3 Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.3 Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.3 Generally, must be offered to all employees at least 21 years of age who worked at least 1,000 hours in a previous year.3
Withdrawals, Loans and Payments Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax. Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax. Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax. Withdrawals permitted after a specified event occurs (e.g., retirement, plan termination, etc.) subject to federal income taxes. Plan may permit loans and hardship withdrawals; early withdrawals subject to an additional tax.
Vesting May vest over time according to plan terms. Employee salary reduction contributions and most employer contributions are immediately 100% vested. Some employer contributions may vest over time according to plan terms. Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms. Employee salary reduction contributions are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Notes

1. Maximum compensation on which 2012 contributions can be based is $250,000 ($255,000 for 2013).
2. This because employer can deduct this as wages/salaries. Employee can get deferral of tax to a later date.[3]
3. In truth employers don't always cover everyone. While the above described employees must be considered under the coverage rules, the rules do not then require 100% coverage or participation. note that very large employers may have many plans, each covering a narrowly defined subset of the company's employees.[3]

Profit sharing

A profit sharing plan or stock bonus plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan can include a 401(k) plan.[1]

Safe harbor 401(k)s

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.

401(k) plans defined

A 401(k) plan is a qualified (i.e., meets the standards set forth in the Internal Revenue Code (IRC) for tax-favored status) profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan under which an employee can elect to have the employer contribute a portion of the employee’s cash wages to the plan on a pre-tax basis. These deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reflected as taxable income on the employee’s Form 1040, U.S. Individual Income Tax Return.

Employees who would like to change their employer's 401(k) plan should refer to How to Campaign for a Better 401(k) Plan.

Traditional 401(k)

A traditional 401(k) plan allows eligible employees (i.e., employees eligible to participate in the plan) to make pre-tax elective deferrals through payroll deductions. In addition, in a traditional 401(k) plan, employers have the option of making contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. These employer contributions can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time, or be immediately vested.

Designated Roth accounts in 401(k) plans: Beginning in 2006, a 401(k) plan (but not a SARSEP or SIMPLE IRA plan) may permit an employee to irrevocably designate some or all of his or her elective contributions under the plan as designated Roth contributions. The plan must contain language that allows for these Roth contributions.

A designated Roth account is a separate account under a 401(k)plan to which designated Roth contributions are made, and for which separate accounting of contributions, gains, and losses is maintained.

Money purchase plan

A money purchase pension plan is a plan that requires fixed annual contributions from the employer to the employee's individual account. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.[1][Comments 2]

SIMPLE 401(k)

The SIMPLE 401(k) (Savings Incentive Match PLan for Employees) plan was created so that small businesses could have an effective, cost-efficient way to offer retirement benefits to their employees. A SIMPLE 401(k) plan is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans. As with a safe harbor 401(k) plan, the employer is required to make employer contributions that are fully vested. This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year. Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans of the employer.

Target benefit plan

A target benefit plan is a type of pension plan that contains features of a defined contribution plan but is made to appear like a defined benefit plan.[Comments 2]

It is similar to defined benefit plan in that the annual contribution is determined by a formula to calculate the amount needed each year to accumulate (at an assumed interest rate) a fund sufficient to pay a projected retirement benefit, the target benefit, to each participant upon reaching retirement. It is similar to a defined contribution plan in that the plan does not guarantee any benefit will be paid. The plan's only obligation is to pay whatever benefit can be provided by the amount in the contributor’s account. The actual earnings on the individual accounts may differ from the estimated earnings used in the assumptions and the investment performance of that account through the years.

Keogh plan (qualified)

A qualified retirement plan that may either be a defined benefit plan or a defined contribution plan. A Keogh plan is intended for self-employed individuals and partnerships. If you are a sole proprietor, consider the Solo 401(k) plan.[4][Comments 3]

Government, schools, tax-exempt organizations

Employer Retirement Plan Comparison Table
403(b) (qualified) 457(b)
Setting Up and Operating a Plan
May use IRS Model Form as plan document No No
Annual return required Yes8 Yes
Annual nondiscrimination testing Yes1,9 Yes
Plan Assets
Invested in IRAs Other2 Other2
Maximum Contributions
Employee contributions3 Up to $17,500 Up to $17,500
Employer contributions3 Optional Up to $17,5004,5
Age 50+ catch-up contributions3 Up to $5,500 Up to $17,5006
Accessibility
Loans allowed Yes Yes6
Hardship withdrawals allowed Yes Yes7

1. Only required if plan has employer contributions but never for government plans.
2. Other - Generally, the plan's assets are held in a tax-exempt trust, though they can also be held in custodial accounts and annuity contracts.
3. All Dollar limits are for 2013 and subject to cost-of-living adjustments in future years (except the age 50+ catch-up contributions for Payroll Deduction IRAs).
4. The maximum combined employer and employee contributions are for 2013 the lesser of 100% of an employee's includible compensation, or $17,500 or more if additional contributions permitted by plan (age 50+ catch-up contributions or 3 years prior to normal retirement age).
5. Employer may contribute to an employee's retirement account but the total employer and employee contributions may not for 2013 exceed 100% of the employee's compensation, or $51,000 or more if additional contributions permitted by plan (age 50+ catch-up contributions, 15 or more years of service or 3 years prior to normal retirement age). In a 403(b) plan, compensation means the employee's includible compensation.
6. Only applies to government plans.
7. Hardship, if offered in a 457, is called an "unforseen emergency."[3]
8. This is true for more of these plans recently. See Form 5500 instructions for exceptions to the filing requirement. Governmental and church sponsors are exempt from ERISA, so many don't file. Other employers who are passive enough in their plan sponsorship (such as by not making any employer contributions) may also be exempt from the filing requirement.[3]
9. Governments may not be completely exempt from coverage/nondiscrimination. See, for example, the 403(b) universal availability rule, in the 1.403(b) regs.[3]

403(b) tax sheltered annuity

A 403(b) tax-sheltered annuity (TSA) plan is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and nonelective employer contributions.

Designated Roth accounts in 403(b) plans: Beginning in 2006, 403(b) plan (but not a SARSEP or SIMPLE IRA plan) may permit an employee to irrevocably designate some or all of his or her elective contributions under the plan as designated Roth contributions. The plan must contain language that allows for these Roth contributions.

A designated Roth account is a separate account under a 403(b) plan to which designated Roth contributions are made, and for which separate accounting of contributions, gains, and losses is maintained.

457(b) deferred compensation plan

Created in 1978, a 457(b) plan is a non-qualified tax-deferred compensation plan similar to qualified plans such as the 401(k) and 403-b. If you work for a state or local government or for a tax-exempt organization, you may be able to participate in a section 457 deferred compensation plan. [5] The 457 plan may be available as an additional voluntary retirement savings vehicle for state or local government or tax-exempt organization employers also offering a public employees pension system. Or they can be offered as a supplemental retirement option for those state or local government or tax-exempt organization employers offering a 401-k or 403-b plan. [6] There are two basic types of 457 plans:

  • Government Plans: Local and state governments are eligible to establish a 457(b) plan for their employees. This type of 457(b) covers employees of a state (including the District of Columbia), a political subdivision of a state, any agency or instrumentality of a state, or political subdivision of a state. These types of employees can include: local and state government workers, fire fighters, police personnel, and public school employees.
Section 1448 of the Small Business Jobs Protection Act of 1996 (SBJPA) added 457(g) of the Code, which requires that 457(b) plans maintained by state or local government employers hold all plan assets and income in trust, or in custodial accounts or annuity contracts (described in 401(f) of the Code), for the exclusive benefit of their participants and beneficiaries.
Contributions to the 457-b plan qualify for the savers credit. [7]
  • Non-Government Plans: Tax-exempt organizations that are non-governmental (hospitals, charitable organizations, unions, among others) must generally limit participation to a select group of management or highly compensated employees. This is due to the rules under Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA generally requires that a private retirement plan providing benefits to employees be funded by a trust or annuity contract. The rules, however, require that private 457(b) plans be unfunded in order to obtain tax benefits. Therefore, a plan will violate ERISA unless an exception applies. This provision means that the 457 plan assets are the property of the sponsoring employer and are subject to the employer's general creditors, until paid out to plan participants.[8]
  • Please see the 457-b wiki article for the plan details, e.g. combining with other qualified plans, no 10% early withdrawal penalty if..., special 'catch-up' provisions if...

457(b) additional info

  • State and local government plans fall into the "non-qualified" category because they don't pay tax.[9]
  • Government 457(b) plans MUST be funded, as indicated above because the vested account balances are being held "for the exclusive future benefit of the employee". This is the definition of the doctrine of "economic benefit", something unfunded deferred compensation may not have, or it would be income to the employee.[10]
  • Non-profit (excluding churches) organizations may offer a 457(b) plan that CANNOT be funded. This does not mean the employer may not set aside funds in trust with the intent to pay them out to the employee in future years. "Unfunded" simply means there may not be an "economic benefit", which almost always means that the employer must hold them as assets to the non-profit organization, subject to the claims of their creditors. This also generally means that plans balances are not transferable between employers.[10]

Non-qualified retirement plan

A non-qualified retirement plan does not meet the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and therefore does not qualify for favorable tax treatment.

In essence, a non-qualified retirement plan is a contract to provide pension benefits. Individuals can create one, but most are created by employers.

Contributors to non-qualified plans don't get the same tax benefits as contributors to qualified plans, such as 401(k)s, do. However, non-qualified plans can be much more flexible in setting benefit amounts and timing payouts.

The contributions made to these plans are usually nondeductible to the employer and are usually taxable to the employee. However, they allow employees to defer taxes until retirement. Non-qualified plans are often used to created to attract and retain highly paid employees.

Deferred compensation plan (non-qualified)

Deferred compensation is the term used for future income that would have otherwise been realized in the present.

But when used in context by employers, the name denotes a non-qualified "promise to pay" on the part of the employer. There are many forms, which often include the increased valuation of the company's stock, measures of executive performance, cash value built in life insurance, salary increases/bonuses for the next year not paid by the employer but kept in a company trust, and so on.

Each participating employee needs to understand that the assets set aside in a Deferred Compensation plan are nothing more than the employer's promise to pay them at a future date. This promise is only as good as the employer's ability to keep it, i.e. assets are at risk if the employer fails. This is a different situation than qualified plans, where vested vested account balances are 100% owned by the employee regardless of employer status.

Deferred compensation plans are very hard to describe, as it is at the employer's discretion. It is really about contract law: A written agreement between an employee and employer, and is not subject to the statutory law administered by the DOL and IRS that governs qualified plans.[10]

Notes

Forum notes

  1. The payroll deduction IRA is not very common, however.
  2. 2.0 2.1 Money Purchase and Target Benefit plans aren't found much at all. Money Purchase Plan especially is a dinosaur after law changes in late 90's made it superfluous and potentially unbeneficial for a business.
  3. A Keogh plan has little significance anymore; other than in the calculation of "compensation."

Ref: Re: Wiki revised - Employer Retirement Plan Overview, mah001, direct link to post.

References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 US Dept. of Labor Retirement Plans, Benefits & Savings
  2. 2.0 2.1 2.2 2.3 Choosing a Retirement Solution for Your Small Business, from the IRS.
  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Re: Wiki revised - Employer Retirement Plan Overview, mah001, direct link to post.
  4. Solo 401(k) Plan, in the Bogleheads' forum
  5. 26 USC § 457 - Deferred compensation plans of State and local governments and tax-exempt organizations, Legal Information Institute, Cornell Law School
  6. 403-bwise. 457 FAQ
  7. Pub 571 savers credit, IRS
  8. 403-bwise. 457 FAQ
  9. Employer Retirement Plans - Is this OK?, in the Bogleheads forum
  10. 10.0 10.1 10.2 Deferred compensation--what is it?, in the bogleheads.org forum

External links