Millions of American workers save a portion of their earnings inside employer-sponsored retirement plans such as 401k's, 403b's, 457s and other plans that allow their participants' contributions to grow tax-deferred. And while the aforementioned plans are by far the most common, they are not the only types of retirement savings plans in use. Following are some of the less-common retirement plans that some employers use in lieu of the mainstream plans.
401a plans
In reality, virtually all qualified defined-contribution retirement plans can be referred to as 401a plans, because paragraph A of Section 401 in the Internal Revenue Code lays out a boilerplate type of plan that sets the rules that all subsequent plans in the code (such as 401k plans) must adhere to. It is not mandatory that employee deferrals be allowed in 401a plans; therefore, these plans are commonly used as funding vehicles for profit-sharing or money-purchase pension plans that are funded entirely by the employer, often with company stock.
They resemble their 401k cousins in most other respects, such as vesting schedules, contribution limits and tax treatments, and they provide essentially the same benefits as the more mainstream plans. But they allow for different levels of benefits to be paid to various groupings of employees. They also do not operate under the strict nondiscrimination rules that apply to other types of plans. Many educational and not-for-profit entities use these plans to provide additional benefits to teachers and educators that exceed what they can give in a 403b or 457 plan.
419e plans
Commonly known as Welfare Benefit Plans, these plans essentially function as funding vehicles for insurance benefits that employees can use after they stop working.
These versatile plans allow employers to determine a group of insurance benefits for their employees, then make contributions into these plans on behalf of the employees in much the same fashion as they would make matching retirement plan contributions. The benefits are activated for employees when they retire. The plans provide various forms of insurance coverage after employees stop working. 419e plans can offer life, health, supplemental disability, health, dental and Medicare supplemental insurance. These benefits can differ or complement the benefits that the employees have during their working years, depending upon how the plans are set up.
These plans can obviously provide a big boost for employees who would otherwise have to pay for such benefits in retirement -- or do without. Employers that fund these plans can also take substantial current tax deductions for their contributions, although contributions may not be completely deductible. Plan contributions are irreversible and must be held by an independent trustee, which makes them generally exempt from creditors.
Contribution and benefit levels, which are based on the number of employees covered and their projected retirement ages and longevity, must be calculated and certified each year by an independent actuary hired by the plan administrator. These plans must also be nondiscriminatory and have no vesting schedule; employees automatically become eligible to receive benefits when they reach a specified age. The cost of 419e plans can be high, so they are generally appropriate only for small companies that employ a handful of long-term employees, such as private medical practices.
Employers that use these plans must be careful follow Internal Revenue Service regulations to the letter to ensure that their contributions are deductible. Further, if the company is unable to make the required contributions, the policies in the plan lapse and employees lose their benefits.
VEBAs
A Voluntary Employee Beneficiary Association is a group form of welfare benefit plan. A VEBA is essentially a pooled version, allowing multiple employers to merge their benefit accounts. They closely resemble their individual welfare benefit cousins in terms of tax treatment, segregation of assets and rules pertaining to contributions and distributions from the plan.
VEBA beneficiaries must share a common grouping of some sort, such as the same employer, labor union or collective bargaining agreement. The Big Three automakers created the world's largest VEBA in 2008 when they merged the benefits plans of each company into a single plan that now holds around $45 billion in assets.
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