Practice Areas > Employee Benefits
There are numerous common employee benefits that are frequently used. They include:
401(k) plan. This plan allows an employee to choose what kind of investments the employer will make on the employee's behalf. The employer selects different investments to offer, while the employee chooses which they prefer.
Cafeteria plan. A plan in which the employer offers a variety of different benefits, and the employees choose those benefits that fit their individual needs.
Defined benefit plan. Also known as "unit benefit plan," this is a plan in which employees are promised that upon retirement they will receive a specific amount of money according to a formula, a calculation that may be based on how long the employee worked for the company, and how much he or she earned.
Defined contribution plan. This plan refers to one in which the employer makes regular contributions of a specified amount of money. In contrast to a defined benefit plan, it does not promise the employees any specific amount of retirement benefits. The employee's retirement benefit will depend on how much was contributed to his or her account, and how the plan's investments performed over the years.
Employee Stock Ownership Plan (ESOP). This plan is primarily funded by the company's own stock, and does not depend on whether the company has made a profit.
Fixed benefit plan. In this kind of plan, the amount of retirement benefits is based on a formula that does not include the number of years the employee worked for the company. It could be a particular dollar amount, and it may be based on some percentage of the employee's pay.
Individual Retirement Account (IRA). People who are not covered by any pension plan at work may use an IRA to save for retirement. In a traditional IRA, the contributions are made from the person's taxable income, and grow tax-free in the IRA. A Roth IRA is funded from a person's income, but that income is not taxed in the year it is earned. Instead, the income grows over the years and is taxed when the person withdraws it after he or she retires.
Money-purchase plan. A defined-benefit plan in which the employer must contribute a specific amount of money each year to each participant's account.
Multi-employer plan. In this kind of plan, two or more employers pool their contributions for the benefit of their employees. The plan may be established and maintained according to the terms of a collective bargaining agreement between the employers and a labor union.
Profit-sharing plan. A profit-sharing plan may be funded from the company's profits, but is not required to be. The terms of a profit-sharing plan will set forth a formula to determine how much should be contributed each year, or the plan may leave the amount to the employer's discretion.
Qualified plan. A qualified plan is one that complies with ERISA, and requires certain standards of vesting and accrual of benefits, and compliance with "nondiscrimination rules."
Retirement plan. A retirement plan provides retirement income, or it is a savings device in which contributions appreciate over time, with income taxes deferred until withdrawals are made when an employee reaches a certain age.
SIMPLE plan. "SIMPLE" is an acronym for "savings incentive match plans for employees." It describes a plan in which employees can make tax-deferred investments and the employer makes matching contributions. The plan can take the form of an IRA or a 401(k) plan.
Simplified Employee Pension (SEP). In a SEP, the employer directly funds IRAs or annuities that are established by or on behalf of the employees.
Stock bonus plan. This plan is funded by shares of the company's stock.
Target-benefit plan. In this plan, the employer has some idea of what participants should receive for retirement benefits, and uses an actuarial formula that will meet that target amount by the time the employee is ready to retire.
Thrift or savings plan. This plan indicates that the participating employees must make contributions. The employer may make matching contributions, but isn't required to.
Top-hat plan. A top-hat plan is one offering unfunded deferred-compensation plans for upper management or highly compensated employees. A top-hat plan is not subject to some provisions of ERISA.
Top-heavy plan. This plan provides benefits for key employees, such as officers or owners of the company, that are worth more than 60 percent more than the benefits offered to regular employees.
Welfare benefit plan. A welfare benefit plan provides medical benefits and other non-pension benefits to employees and their families.
Changes may occur in this area of law. The information provided is brought to you as a public service, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or substitute for the advice of a lawyer.
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