Millions of American workers save a portion of their earnings in employer-sponsored retirement plans such as a 401(k), 403(b), or 457. But there are several lesser-known plans that are designed for government and non-profit employees and for highly compensated executives.
Below are five less-common retirement plans, the type of employees for which they are designed, and how they work.
- Less-common retirement and benefit plans offered to some employees include 401(a)s, 419(e)s, 414(h)s, Voluntary Employees Beneficiary Associations, and Supplemental Executive Retirement Plans.
- Each is designed for specific types of workers, such as those in government or non-profits, or those who are highly compensated.
- Some of these plans can be costly to run and can lose tax-advantaged status if IRS regulations aren’t followed.
1. 401(a) Plans
All qualified defined-contribution retirement plans could be referred to as 401(a) plans because paragraph A of Section 401 in the Internal Revenue Code lays out a boilerplate type of plan and a set of rules that all subsequent plans in the code, such as 401(k)s, must adhere to.
However, 401(a) plans are commonly used as vehicles for profit-sharing or money-purchase pension plans that are funded entirely by the employer, often entirely with company stock. Employee contributions may be allowed but are not mandated.
They resemble 401(k)s in most other respects, such as vesting schedules, contribution limits, and tax treatments, and provide essentially the same benefits as more mainstream plans.
But 401(a)s also allow for different levels of benefits to be paid to specific groups of employees, and they do not have the strict nondiscrimination rules that apply to other types of plans.
Many government agencies, and educational and not-for-profit entities, use these plans to provide benefits that exceed what they can offer in a 403(b) or 457 plan.
2. 419(e) Welfare Benefit Plans
A 419(e) welfare benefit plan essentially functions as a funding vehicle for insurance benefits that employees can draw upon after they stop working. These versatile plans allow employers to choose an insurance benefits plan and make contributions to it for employees during their working years. This is done in much the same way that a company would make matching retirement plan contributions in a qualified plan.
The benefits are activated for employees when they retire. They may provide various types of coverage, including life, health, supplemental disability, dental, and Medicaid supplemental insurance. These benefits can differ from or complement benefits that the employees have during their working years, depending upon how the plan is set up.
If an employer becomes financially unable to make the required contributions, the policies in a 419(e) will lapse and employees will lose their benefits.
A 419(e) plan can provide a substantial overall benefit for employees who would otherwise have to pay for these benefits themselves or go without them when they retire.
The cost of 419(e) plans can be quite high. They are generally appropriate for small firms with a handful of long-term employees, such as a private medical practice.
Employers that fund these plans can take substantial tax deductions for their contributions, although the contributions may not always be completely deductible. Employers that use these plans must take care to follow the IRS regulations to the letter to ensure the contributions are deductible.
Plan contributions are irreversible and must be held by an independent trustee, making them generally exempt from creditors. Contribution and benefit levels must be calculated and certified each year by an independent actuary hired by the plan administrator. These calculations are based upon the number of employees covered and their projected retirement ages and longevity.
Employees automatically become eligible to receive benefits when they reach a specific age, such as 65.
3. Voluntary Employee Beneficiary Associations
Voluntary Employee Beneficiary Associations (VEBAs) represent a group form of a welfare benefit plan. That is, they aim to cover medical, dental, and other basic insurance-related expenses to retirees in the group.
VEBAs are a pooled version of the welfare plan that allows different employers to merge their benefits accounts into a single entity. They closely resemble their individual welfare benefit cousins in terms of tax treatment, segregation of assets, and rules pertaining to contributions and distributions from the plan.
The Big Three automakers created the world's largest VEBA in 2010 when they merged their benefits plans into a single plan that now holds more than $60 billion in assets.
The key criterion for all VEBAs is that the beneficiaries must share a common identity of some sort, such as the same employer, labor union, or collective bargaining agreement.
4. Supplemental Executive Retirement Plans
Commonly referred to as top-hat plans, Supplemental Executive Retirement Plans (SERPs) are a form of non-qualified deferred compensation plan funded solely by the employer.
Like most non-qualified plans, they are designed solely for highly compensated or key employees and provide supplemental retirement benefits as long as certain conditions are met, such as the employee remaining with the company until retirement or not taking a job with a competitor.
Benefits are often funded with cash value life insurance and grow tax-deferred until they are paid out, at which time they are reported as taxable compensation to the retiree and become deductible for the company.
SERPs have been criticized by some as providing excessive compensation to the favored few in a company at the expense of most of the employees.
5. 414(h) Plans
Designed solely for public government employees, this type of money-purchase pension plan allows both employer and employee contributions to grow on a tax-deferred basis until retirement.
The plans typically have a "pick-up" provision that permits employers to put employee contributions into their accounts on a pretax basis in the same manner as a 401(k) or other traditional plans.
Vesting is always immediate, and employees who leave to work for another employer can roll their 414(h) into their new employer's plan as long as the latter accepts rollovers.