Types of Employer-Sponsored Retirement Plans That Are Not A 401(k)

Taylor Ledbetter
| May 15, 2024 |

If your employer offers a retirement plan, chances are it’s a 401(k) plan. Even though this is the most popular type of plan for employers to offer, there are several other retirement savings options out there. All retirement plans incentivize employees to do the same thing: save for retirement! However, they are all slightly different regarding contributions, taxation, and early withdrawals. Today, I want to walk through some other plans employers may offer and discuss their specific differences.

403(b) Plans

Another very popular type of retirement plan is a 403(b). Public schools and nonprofit organizations specifically offer nonprofit plans. Eligible participants may include teachers, school administrators, government employees, church employees, nurses, and doctors. 403(b) and 401(k) plans have a lot of similarities, such as:

  • Saving money for retirement through payroll deductions.
  • Employer matches.
  • Annual contribution limit of $23,000 ($30,500 if age 50 or older).
  • Participants must reach age 59 ½ before withdrawing funds or face a 10% early withdrawal penalty.

These two plans are the most similar out of the ones we will cover. The most important difference is simply who is allowed to use them. For-profit companies provide 401(k) plans. As mentioned, 403(b) plans are for public schools, churches, and tax-exempt organizations.

One of the most unique differences with this type of plan is you can add additional contributions above the catch-up limits listed above. If you are an employee who participates in a 403(b) plan and has worked for your company for at least 15 years, you can make an additional catch-up contribution each year that’s the lesser of:

  • $3,000.
  • $15,000 minus the prior 15-year catch-up contributions.
  •  $5,000 times your years of service minus the total amount of 403(b) deferrals contributed.

The big advantage of a 403(b) plan for employees age 50 or older with 15 years of service is that you can take advantage of both catch-up contributions.

457(b) Plan

A 457(b) plan also has characteristics similar to 401(k) plans. However, it is reserved for employees of state and local governments and some nonprofits. A notable difference between these two plans is that a 401(k) is governed by ERISA, and a 457(b) is not. ERISA stands for “Employee Retirement Income Security Act”. ERISA sets minimum standards for retirement plans that provide protection for employees. Since 457(b) plans are not governed by ERISA, the IRS does not impose a 10% early withdrawal penalty to participants who retire or leave employment before age 59 ½. However, the amount taken is still subject to normal income taxes.

Another notable difference is that 457(b) plans have a double-limit catch-up provision that 401(k) plans do not have. This essentially allows participants who are three years away from their normal retirement age to compensate for years they did not maximize their contribution to the plan but were eligible. This provision allows an employee to contribute up to $46,000 in 2024.

Profit Sharing Plans

A profit-sharing plan is a type of retirement plan that gives employees a share in company profits. Employees receive a percentage of company profits based on quarterly or annual earnings. The employer contributions are completely discretionary because, of course, company profits are different every year. However, employees do not contribute to profit-sharing plans because contributions are not made via payroll deduction. That is the biggest differentiating factor regarding all the accounts we have covered.

There are several different ways for a business to determine how much profit to allocate to an employee’s account. Typically, an employer first calculates all their employees’ compensation added together. Then, each employee’s annual compensation is divided by that total. That percentage is then applied to the amount of total profits being shared.

Simple IRA’s

SIMPLE stands for “Savings Incentive Match Plan for Employees.” Employers can make a 2% compensation contribution for each eligible employee. Or they can choose a dollar-for-dollar match of up to 3% of compensation for all active employees in the plan. In 2024, the maximum employee contribution is $16,000. If you are age 50 or older, you can make an additional catch-up contribution of $3,500 for a total of $19,500.

The biggest difference between a SIMPLE IRA and a 401(k) is that SIMPLE IRAs require employers to make a mandatory employer contribution every year. Whereas 401(k) ‘s do not. Another difference is that employers are only eligible for a SIMPLE IRA if they have 100 or fewer employees. At the same time, 401(k) ‘s are eligible for employers of any size—additionally, employer contributions to a SIMPLE IRA vest immediately. You can leave your job and roll over your entire SIMPLE IRA to your new employer plan. At the same time,
401(k) employer contributions may have a vesting schedule. This means you may not be eligible to roll over your entire account balance right away if you switch jobs.

Aside from the 401(k), these are the other most popular retirement plans you may see in the workplace. These all have very similar characteristics regarding pretax savings for retirement. However, these minor differences between plans can make a big difference when planning for retirement and minimizing taxation over your working life. If you are unfamiliar with your plan at work, you must speak with a professional who can break down the details.