Employer sponsored retirement plan

Employer Sponsored Retirement Plan

A retirement plan in which both an employer and an employee make contributions into an account each month. The contributions are invested on behalf of an employee, who may begin to make withdrawals after retirement. Typically, employer sponsored retirement plans are tax-deferred, meaning that the employee does not pay taxes on the funds in the pension until he/she begins making withdrawals. However, some plans are not tax-deferred, and, instead, employees make tax-free withdrawals. Employers are not legally required to offer retirement plans, though most major companies do. Plans may have defined contributions, defined benefits, or both. See also: 401(k), IRA.

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Employer sponsored retirement plan.

Employers may offer their employees either defined benefit or defined contribution retirement plans, or they may make both types of plans available.

Any employer may offer a defined benefit plan, but certain types of defined contribution plans are available only through specific categories of employers.

For example, 403(b) plans may be offered only by tax-exempt, nonprofit employers, and 457 plans only by state and municipal governments. SIMPLE plans, on the other hand, can only be offered by employers with fewer than 100 workers.

Corporate employers who contribute to a retirement plan can take a tax deduction for the amount of their contribution and may enjoy other tax benefits. However, the plan must meet certain Internal Revenue Service (IRS) guidelines.

Offering a retirement plan may also make the employer more attractive to potential employees. However, employers are not required to offer plans. If they do, they can make the plan as generous or as limited as they choose as long as the plan meets the government's non-discrimination guidelines.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.