Salary reduction plan

Also found in: Dictionary.

Salary reduction plan

A plan allowing employees to contribute pre-tax income to a tax-deferred retirement plan.

Salary Reduction Plan

An employer-sponsored plan whereby the employee does not receive a check for his/her entire salary. Rather, the employer puts a portion of the salary into the plan directly; the contribution is automatically invested for the employee's retirement. This sort of plan may make this reduction either before or after the employee's taxes. This determines whether or not the withdrawals after retirement are taxable. See also: IRA, 401(k).

salary reduction plan

A retirement plan that permits an employee to set aside a portion of salary in a tax-deferred investment account selected by the employer. Contributions made to the account and income earned by the contributions are sheltered from taxes until the funds are withdrawn. Also called 401(k) plan.
Case Study Salary reduction plans offer substantial tax benefits, yet at the same time they can place employee contributions at considerable risk depending on what type of investments are used to fund the plans. Especially risky are plans that invest all or most of the contributions in the employer's common stock. Consider the example of energy conglomerate Enron Corporation, whose stock tumbled nearly 99% to 60¢ per share in the 12 months ending November 2001. At of the end of 2000 approximately half of Enron's $2.1 billion 401(k) plan was invested in Enron common stock. Enron's policy was to match employee contributions at 50¢ on the dollar, for up to 6% of an employee's salary. Like many major corporations, Enron made its contributions to the firm's plan in company stock. Employees were permitted to select alternative investments, but many chose to use Enron shares to fund their contributions. As Enron shares plummeted many employees of the company saw virtually the entire value of their individual 401(k) plans evaporate at the same time as they faced the possibility of losing their jobs in a company that filed for bankruptcy.

Salary reduction plan.

A salary reduction plan is a type of employer-sponsored retirement savings plan. Typical examples are traditional 401(k)s, 403(b)s, 457s, and SIMPLE IRAs.

A salary reduction plan allows you, as an employee, to contribute some of your current income to a retirement account in your name and to accumulate tax-deferred earnings on those contributions. In most plans, you contribute pretax income, which reduces your current income tax, and you pay tax at withdrawal at your regular rate.

Your employer may match some of or all your contribution according to a formula that applies on an equal basis to all participating employees. All salary reduction plans have an annual contribution cap that's set by Congress and allow annual catch-up contributions for participants 50 and older.

With Roth 401(k) and similar plans, you contribute after-tax income but qualify for tax-free withdrawals if you are older than 59 1/2 and your account has been open at least five years.

References in periodicals archive ?
By making these reimbursements tax-free, what the salary reduction plan does is to convert all of these expenditures that you would normally incur into "deductible" expenses--whether or not they normally would be allowed as a deduction.
Under a salary reduction plan, though, if you know your medical insurance premiums are going to be $500 a month, you reduce your salary by that amount, and the $6,000 expense is reimbursed to you tax-free.
Selling and administrative costs in this segment declined 4% in the second quarter when compared to the prior year primarily related to benefits realized from the salary reduction plan implemented by the Company in fiscal year 2009, lower bad debt expense, and other overall cost reduction efforts.
Selling and administrative costs in this segment for the second quarter of fiscal year 2010 declined 12% when compared to the prior year on benefits realized from the salary reduction plan implemented by the Company in fiscal year 2009, lower profit-based incentive compensation costs, lower bad debt expense, and other overall cost reduction efforts.
This salary reduction plan is expected to result in expense savings of over $900,000 on an annualized basis.
To avoid immediate taxation, deferred compensation plans--which include salary reduction plans, 401(k) wrap-arounds and supplemental executive retirement plans--executed after Dec.
The bill would increase the dollar limit on annual elective deferrals under Section 401(k) plans, Section 403(b) annuities, and salary reduction plans in $1,000 annual increments until the limits reach $15,000 in 2005.
Other provisions would relieve top-heavy rules, streamline the reporting rules and the deduction rules for small businesses in order to afford them the opportunity to offer more generous defined contribution plans, eliminate the IRS user fees for small business plans and provide incentives for employers to establish salary reduction plans that will automatically enroll employees.
Increase and index the current catch-up contributions, and allow catch-up contributions under all salary reduction plans for anyone age 50 and older.
Employees who aren't contributing to salary reduction plans should ask themselves, 'Can I afford not to?
25 /PRNewswire/ -- Health insurance, group life insurance, and salary reduction plans that enable employees to accumulate tax-free savings for retirement are the most frequently offered employee benefits, according to a nationwide survey of 217 companies by the Human Resource Advisory group of Coopers & Lybrand L.
Group life insurance is offered by 98 percent of the companies, and salary reduction plans by 92 percent.