A Look at the Employee Savings Plan

An Employee Savings Plan is a retirement account option business owners can present to their employees. Similar to a 401k option, these accounts use pre-tax dollars in order to provide incentive to save for retirement. Employers can match the contributions of their employees as part of a benefit package. While these accounts are similar to traditional 401k options, they have several unique features.

Employee Savings Plan vs. 401k 

A company offers a 401k account to employees for two primary purposes. The first is to give the employee the benefit of a retirement savings account. The second is to grow the 401k pool for the company as a whole. The company has one 401k plan, and this plan is voted on and controlled by the company's board of directors or owners. Employees do not choose their own investment portfolios. When a company makes good decisions with a 401k, all employees benefit. With an Employee Savings Plan, by contrast, each employee chooses the account and how to manage the account. 

Employee Savings Plan vs. IRA

An IRA is an Independent Retirement Account, which is also set up individually by an employee. IRAs are traditionally used by self-employed individuals or those who do not have retirement options through a company. An Employee Savings Plan has more employer involvement than an IRA. Often, the company will recommend the plan and even help get it set up. Further, employers do not traditionally contribute to IRAs. With an Employee Savings Plan, funds can be directly withheld from a paycheck and matched by an employer. For this reason, an employee is always "fully vested" in the Employee Savings Plan, while the same employee may wait until year's end to contribute to an IRA.

Where to Find an Employee Savings Plan

With large corporations, you will likely be offered a 401k option. The Employee Savings Plan is designed for smaller corporations who do not have the resources to invest in a large 401k option. If your company does not offer any retirement benefits, consider speaking to your employer about the Employee Savings Plan alternative. This can give you a more streamlined way to save to your retirement account while costing the employer very little. In fact, offering an Employee Savings Plan can be very tax efficient for an employer, making up for the cost of setting up the option in tax savings.

Benefits of an Employee Savings Plan

As an employee, you will receive tax savings with an Employee Savings Plan. You can place pre-tax dollars into the account. Essentially, this reduces your tax burden each year by reducing your taxable income. For example, if you earn $50,000 but place $5,000 into your account, you will be taxed as if you had earned only $45,000. Like other retirement options, your savings will also grow tax deferred, meaning you do not have to pay each year on any income earned while the account is active. For an employer, offering this option can allow you to compete with larger corporations that may have more extensive benefits to provide employees.

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