401(k) Employer Retirement Plans
An employer retirement plan is a benefit offered to employees by their employer or an employee organization, like a union. Most private-sector employer retirement plans are covered by the Employee Retirement Income Security Act (ERISA), which outlines protections for plan participants and beneficiaries. One of the more well-known examples is a 401(k) plan, which is named after the section of the tax code that created these plans. However, there are many other types of employer retirement plans.
Broadly speaking, employer retirement plans are classified as defined benefit or defined contribution plans, and qualified or nonqualified plans. Qualified plans are “qualified” for favorable tax treatment under IRS and ERISA requirements. Contributions and earnings within the plan are tax-deferred until they are withdrawn from the plan. Defined benefit plans specify the amount the employee will receive and are often referred to as “traditional pension” plans.
Defined contribution plans are funded by the employee, and employers may also contribute to the plan. However, the amount the employee will eventually receive is determined by the amount contributed to the plan, and by how well the plan’s underlying investments perform.
Types of Employer Retirement Plans
There are a wide range of employer-sponsored retirement plans, designed to fit different types of businesses and employees. Some of the more common types include:
IRA-Based Plans. While individuals can open Individual Retirement Accounts (IRAs), businesses can set up and fund them for employees, too. Examples of IRA-based plans include:
- Payroll deduction IRAs, which are funded through employee payroll deductions.
- SEPs are Simplified Employee Pension plans and allow employers to contribute to IRAs for employees.
- SIMPLE IRAs are Savings Incentive Match Plans for Employees, and both employees and employers can contribute to these plans.
401(k) Plans. These qualified plans allow employees to contribute part of their earnings on a pre-tax basis. There are different types of 401(k) plans, including:
- Traditional 401(k)s allow eligible employees to make pre-tax contributions through payroll deductions, and employers can also contribute on the employee’s behalf.
- SIMPLE 401(k)s allow small businesses to offer retirement plans more cost-effectively to their employees, and can be set up by businesses that have 100 or fewer employees.
- 403(b) Plans. Available to public schools and certain tax-exempt organizations, 403(b) plans are qualified plans that are similar to 401(k) plans and are funded through employee and employer contributions.
- 457(b) Plans. These non-qualified plans are used by state and local governments and some tax-exempt organizations and can be offered in addition to other retirement plans. 457(b) plans are divided into government and non-government plans and have special rules that govern their funding and use.
Understanding the Plans
If you’re considering establishing an employer retirement plan and want to know more about the different options available to you, FiduciaryFirst can help. We’re seasoned in employer-sponsored retirement plans, and we will work with you to select the plan that’s right for your business and employees. We can also help with administrative tasks effectively, and help align your plan with your company’s objectives. Call us at 866-740-6113 to find out more.
Tracking Number: 1-509510.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, the plan sponsor will be in compliance with ERISA regulations.