What Is an Employee Savings Plan?

An employee savings plan (ESP) is a plan provided by an employer that allows employees to set aside a portion of their pre-tax wages for retirement savings or othe𝐆r long-term goals, such as paying for college tuition or purchasing a home.

Many employers match their employees' contributions up to a certain dollar amount, or a certain percentage. A popular ESP in the U.S. is the 401(k) retirement plan, which offers four types of plans.

Understanding Employee Savings Plans

Employees are always 澳洲幸运5官方开奖结果体彩网:fully vested in their own employee savings plan contributions. However, many plans require that employees remain employed for a minimum amount of time before they are vested and eligible to withdraw employer-matched funds.

ESPs can be an attractive and relatively easy way for employees to lower their taxes and save for long-term goals. In fact, with the phasing out of corporate 澳洲幸运5官方开奖结果体彩网:defined-benefit pension plans, ESPs are becoming the sole option for individuals to save for retirement through their employer.

Defined-Contribution Plans & Tax Benefits

ESPs mostly support saving for retirement and come in two main forms: 澳洲幸运5官方开奖结果体彩网:defined-contribution plans offered by corporations (known as 澳洲幸运5官方开奖结果体彩网:401(k) plans), and those offered by public or non-profit entities (known as 澳洲幸运5官方开奖结果体彩网:403(b) or 457(b) plans).

Contributions to both types of plans are made through payroll deductions that lower employees’ taxable income.

Many employers offer Roth versions of these plans. The employee's contributions to Roth accounts are made with after-tax dollars, so they don't reduce gross income. However, qualified withdrawals are tax free.

The money contributed to traditional 401(k) plans grows tax deferred until funds are withdrawn in retirement and such distributions are included in taxable income.

Contribution Amounts in 2024 and 2025

For 2024, the contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $23,000. For 2025, that limit is $23,500.

Those age 50 and over can add an additional catch-up contribution of $7,500 for both 2024 and 2025. Employer matching contributions do not reduce this total.

In addition, starting in 2025, a higher catch-up contribution amount of $11,250 is available to employees aged 60, 61, 62, and 63.

Other Key Components

Defined-contribution plans also offer portability. This means that an employee who switches jobs may either roll over their plan balance into an identical plan at their new employer or transfer the balance into an individual retirement account (IRA) that they maintain on their own.

Assets in a personal IRA also grow tax deferred until withdrawn. IRAs have lower annual contribution limits than 401(k) plans. For 2024 and 2025, individuals can contribute up to $7,000 to an IRA, or $8,000 if aged 50 or over.

Health Savings Account

A 澳洲幸运5官方开奖结果体彩网:Health Savings Account (HSA) is another example of an ESP. These tax-advantaged accounts allow individuals with 澳洲ꦚ幸运5官方开奖结果体彩网:high-deductible health p𓆉lans (HDHPs) to save for medical🧸 expenses that H🍸DHPs do not cover.

Tax Benefits

Contributions are made into the account typically by the individual or the individual's employer and are limited to a maximum amount each year.

Contributions made by you or someone other than your employer are tax deductible. Interest and other earnings on assets in the account grow tax free. Withdrawals for qualified medical expenses may be tax free.

The contributions are invested over time and can be used to pay for qualified medical expenses, which include most medical care such as dental, vision, and over-the-counter drugs.

Contribution Amounts

For 2024, you may contribute up to $4,150 to an HSA if you have self-only HDHP coverage. You may contribute up to $8,300 if you have family HDHP coverage. For 2025, those amounts are $4,300 and $8,550, respectively.

Less Common Employee Savings Plans

In addition to or in place of defined-contribution plans, 𓆏some employers 💎offer profit-sharing plans in which the employer makes an annual or quarterly lump sum contribution into a tax-deferred account that could be a 401(k).

Non-qualified deferred compensation plans, though less common, are another way for 澳洲幸运5官方开奖结果体彩网:highly compensated employees to save for retirement or other financial goaඣls.

These plans allow participants the opportunity to make pre-tax contributions up to 100% of their annual compensation. They are typically rese𝕴rved for a limited number of high-earning employees within a company.

They offer greater flexibility than defined-contribution plans in terms of withdrawals for college or other non-retirement goals but do not carry the same protections as qualified plans.

The Bottom Line

Employee Savings Plans are employer-sponsored retirement savings plans that offꦐer tax-advantaged opportunities to invest for the future.

They include various defined-contribution plans such as the 401(k), 403(b), and 45ﷺ7(b), where contributions made by employees are tax deductible and the money 🔥in the accounts grows tax deferred for years, until withdrawn.

The Roth version of the 401(k), 457(b), and 403(b) in♒volves after-tax contributions which are not tax deductible, but qualified 🌊withdrawals are tax free.

Health Savings Accounts, profit-sharing plans, and non-qualified deferred compensaꦅtion pl💖ans are other examples of ESPs. Contributions to HSAs are tax deductible.