Employers typically contribute to defined contribution retirement accounts such as 401(k) plans, 403(b) plans, SIMPLE IRA plans, SEP plans, or sometimes to defined benefit plans like pensions. The most common example of an employer-contributed retirement account is the 401(k) plan, where employers often match a portion of the employee's contributions up to a certain percentage of salary.
Common Employer-Contributed Retirement Account Types
- 401(k) Plans: The most common employer retirement plan. Employees contribute pre-tax salary amounts, and employers often provide matching contributions. There are traditional and Roth 401(k) options with different tax treatments. Vesting schedules may apply to employer contributions.
- 403(b) Plans: Similar to 401(k) plans but for employees of public schools and certain non-profits. Employers may also contribute and match employee contributions.
- SIMPLE IRA Plans: Typically for small businesses with fewer than 100 employees. Employers either match employee contributions up to 3% of salary or contribute 2% regardless of employee participation.
- SEP Plans: Simplified Employee Pension plans where employers contribute to employees’ IRAs, usually based on a percentage of salary.
- Defined Benefit Plans (Pensions): Employers promise a fixed retirement benefit, managing the investment risk themselves.
Employers choose contributions either as a matching percentage of employee contributions or as a fixed contribution regardless of employee input. Employees then own the contributions and investment gains according to vesting schedules, if applicable.