Retirement Accounts - Types of Employee-Sponsored Plans
Employer-sponsored plans, sometimes called payroll deduction savings plans, can be either qualified or non-qualified; that is, they can either benefit from tax deferral or not.
- A type of qualified plan called a 401(k) is the norm.
- For 2008, an employee can invest up to $15,500 per year in a 401(k) and cannot withdraw it before age 59 ½ without incurring a 10% tax penalty.
- Employees aged 50 and older can make additional catch-up contributions of up to $5,000.
- Other qualified plans include stock bonus, profit-sharing and pension plans, provided they are for the exclusive benefit of employees or their beneficiaries and they meet tax code requirements as defined by the IRS.
Types of Qualified Plans
Qualified plans can fall into one of these two categories:
- Defined contribution plans, in which the employee has an individual account and his or her benefits are based only on the amount contributed to the account - either by him or herself or the employer - and the payout on these accounts varies with the market.
- Defined benefit plans, in which the employer is responsible for maintaining a fund capable of generating a monthly check for an agreed-upon amount to all participating employees.
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal act protecting the retirement assets of Americans by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets.
- Requires plans to provide participants with important information about plan features and funding. The plan must furnish some information regularly and automatically. Some of this information is available free of charge.
- Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits and to have a non-forfeitable right to those benefits. The law also establishes detailed funding rules that require plan sponsors to provide adequate funding for the plan.
- Requires accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan.
- Gives participants the right to sue for benefits and breaches of fiduciary duty.
- Guarantees payment of certain benefits if a defined plan is terminated through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation.
- Protects the plan from mismanagement and misuse of assets through its fiduciary provisions.