Employee Savings Plan

What Is An Employee Savings Plan?

An employee savings plan is a means by which a certain dollar amount or portion of an employee’s pre-tax earnings are pooled together by employers, usually for their retirement savings or other long-term goals like paying off a mortgage or paying back college debt. Regular contributions are usually made to this effect, with the most popular 401(k) retirement plan.

Deeper Definition

As clearly defined, benefit pension plans are being gradually phased out, employee savings plans have increasingly gained prominence. They are gradually becoming the only option for individuals looking to save up for retirement through their employers. Employees usually have full rights to contributions in the savings plan. Still, recently, several plans maintain that the staff members have to stay employed for at least a specified period before they are granted the rights of eligibility to withdraw the said funds.

The employee savings plans are usually targeted at retirement as a means of support for the individuals. They could be done in any of the two major forms, including the defined-contribution plans or DC plans offered by corporations (known as 401(k) plans) and the others that are provided by public or not-for-profit entities (known as 403(b) or 457(b) plans). Often, to make these contributions to get on the above-listed plans, deductions are made from the employee’s earnings, thus lowering their taxable income. Also, the payment of taxes on the contributions and the interest they accrue are deferred until the withdrawal of the funds occurs. Usually, employers set up the savings plan for their employees, who, in turn, decide on the investments to make and the management of their accounts.

Employee Savings Plan Example

Mark makes earnings of $50,000 per year and makes contributions of $5,000 of that amount to his company’s employee savings plan. In that case, his contribution is deducted from his pre-tax earnings, thus causing his taxable income to reduce to $45,000.

If his employer also contributes a certain percentage, the company can bar him from making any withdrawals whatsoever for about five years. Once this period elapses and he makes withdrawals, the money will be taxable.