What is an 'Employer-Sponsored Plan'

An employer-sponsored plan is a type of benefit plan offered to employees at no or relatively low cost. These plans cover an array of services including retirement savings and healthcare. Employees who enroll in such programs capitalize on the benefit of receiving discounted services. On the other hand, employers offering these plans typically benefit from tax breaks. Also, sponsoring benefits is seen as a way to recruit and retain valuable employees. 

BREAKING DOWN 'Employer-Sponsored Plan'

Employer-sponsored plans span vast geography of services that include different types of group health care plans and retirement savings plans with tax-preferred advantages.  

Employer-sponsored savings plans such as 401(k) and Roth 401(k) plans provide employees with an automatic way to save for their retirement while benefiting from tax breaks. The reward to employees who participate in these programs is they essentially receive free money when their employers offer matching contributions. Due to the rising cost of healthcare services, group health plans are a premium for employees.

Tax Advantages of Employer-Sponsored Plans

Contributes to a 401(k) plan, is done using "pre-tax" dollars. Pre-tax means that money flows directly from the paycheck into the plan before the deduction of taxes. As a result, less of your income ends up getting taxed. Assessment of tax is at the point when funds are removed from the account, usually at a lower rate.

With a Roth 401(k), you contribute money to the plan on an "after-tax" basis. After-Tax means that cash flows from your check into the plan after tax deductions. The trade-off is that qualified withdrawals later down the road are tax-free. A Roth 401(k) plan is a particularly useful tool if you end up in a lower tax bracket upon retirement. 

Some types of employer-sponsored health care plans also offer certain tax advantages. One example is a Health Savings Account (HSA), which is paired with a high-deductible health plan (HDHP).

An HSA is a type of savings account for qualified medical expenses. Contributions are "pre-tax," interest grows tax-free, and withdrawals made to cover qualified medical costs are tax-free as well. And unlike with Flexible Spending Account (FSA), money in your HSA rolls over from year to year.

Some HSAs function as basic savings accounts bearing interest. Depending on the provider your employer works with, you may direct your money into HSA investment accounts offering different mutual fund options just as you would with a 401(k) plan. However, most companies require a member to invest a set amount into a basic HSA account before directing money to an HSA investment account. In this sense, the HSA works like a 401(k) for medical expenses. Money withdrawn for other purposes is taxed.

RELATED TERMS
  1. High-Deductible Health Plan - HDHP

    A health insurance plan with a high minimum deductible that that ...
  2. Roth Option

    A Roth Option available within some employer-sponsored qualified ...
  3. HSA Custodian

    Any bank, credit union, insurance company, brokerage or other ...
  4. Unit Benefit Plan

    A unit benefit plan is an employer-sponsored pension plan with ...
  5. Defined-Benefit Plan

    A defined-benefit plan is an employer-sponsored retirement plan ...
  6. Additional Voluntary Contribution ...

    An additional voluntary contribution is an extra allocation of ...
Related Articles
  1. Financial Advisor

    How to Convince Savers to Put More into HSAs

    HSAs represent a fourth leg on the retirement planning stool. Here's what employees and employers need to know.
  2. Insurance

    Health Savings Account or Health Investment Account?

    Don't just use your HSA as a savings account, use it as an investment account.
  3. Managing Wealth

    Pros And Cons Of A Health Savings Account (HSA)

    Health Savings Accounts let you pay health care costs with pre-tax dollars.
  4. Financial Advisor

    IRS Sets 2016 HSA Deduction Limits

    Contribution limits for HSA plans have increased slightly for 2016. Here's a breakdown of what they are and how they work.
  5. Insurance

    Are Health Savings Accounts Useful in Retirement?

    When saving for retirement, an HSA be a tax-efficient vehicle for future healthcare expenses.
  6. Insurance

    HSA Contribution Limits in 2016

    Find out the 2016 contribution and out-of-pocket limits for health savings accounts and why HSAs are still viable options as health care plans.
  7. Insurance

    Here’s Why You May Be Blocked From HSAs Next Year

    A health savings account can help you save for medical expenses, but starting in 2017 it may be harder to get if your insurance is from Healthcare.gov.
  8. Financial Advisor

    Forget 401(k)s: Put Your Next Savings Dollar Here

    A 401(k) might be the post popular option for retirement savings, but there is another lesser-known option that may make sense for many.
  9. Managing Wealth

    This Is Why HSAs Appeal to High-Income Earners

    Health Savings Accounts are a good deal. But they're a better deal for some than for others. We parse how the plans work – and who benefits the most.
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center