Retirement Savings and Pension Plans
What do employers need to consider regarding retirement
savings and 401(k) plans? One of the most popular and widely offered
retirement plan options is the cash or deferred arrangement (CODA),
commonly known as a 401(k) plan, after the section of the Internal
Revenue Code (IRC) that authorizes them. A CODA is a special type
of defined contribution plan under which an eligible employee can
elect to have the employer defer part of his or her salary and contribute
the deferred amount to the plan or receive the full amount of the
salary as cash. If an employee chooses to defer compensation, it is
not subject to income taxation until it is withdrawn from the plan.
The advent of the 401(k) plan began a major shift in
the way Americans plan and save for retirement. The days of relying
on traditional employer-provided pension plans as the primary source
of retirement income are fast becoming extinct. In their place are
401(k) plans in which employees can save for retirement on a pretax
basis, and employers can better control their retirement costs because
there are no minimum funding levels or guaranteed retirement benefits.
Other employer-sponsored retirement plans that are similar
to but simpler to administer than 401(k) plans include simplified
employee pensions (SEPs) and SIMPLE plans. These plans have specified
minimum requirements and offer less design flexibility in return for
simple administration. Additionally, educational institutions and
nonprofit organizations may provide 403(b) plans for their employees.
Government employers may sponsor 457 plans. These plans have many
of the same features and restrictions as 401(k) plans.
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