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Simple English definitions for legal terms
employee benefit plan
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A quick definition of employee benefit plan:
An employee benefit plan is a written plan that a company creates for its employees, officers, and advisers. It can include things like retirement savings, stock options, bonuses, and health care benefits. There are different types of plans, such as defined-benefit plans that provide a set amount of retirement income, and defined-contribution plans where the employee and employer contribute to an individual account. Some plans, like 401(k) plans, allow employees to choose how their money is invested. The goal of these plans is to provide benefits to employees beyond their regular salary.A more thorough explanation:
An employee benefit plan is a written plan that provides various benefits to employees, officers, and advisers of a company. These benefits can include stock-purchase, savings, option, bonus, stock-appreciation, profit-sharing, thrift, incentive, pension, or similar plans. The term also includes employee-welfare benefit plans, employee-pension benefit plans, or a combination of both. However, plans in which no employees are participants are excluded.
- Defined-benefit plan: This plan provides retirement benefits to employees based on a formula that includes factors such as years of service and compensation. If the trust funding the plan lacks sufficient assets to pay the promised benefits, the employer is required to cover the shortfall.
- Defined-contribution plan: This plan allows each participant to have a separate account funded by the employee's and employer's contributions. The benefits are based solely on what has accumulated in the participant's account.
- 401(k) plan: This retirement and savings plan allows an employee to elect to have a portion of their pretax salary contributed to a defined contribution plan. Employers often match all or part of the employee's contributions.
- Employee-stock-ownership plan (ESOP): This plan invests primarily in the employer's stock and receives special tax benefits. It can be used as a corporate finance tool and allows employees to purchase company stock.
- Simplified employee pension plan (SEP): This plan is attractive to small employers because it is much easier to administer than a 401(k) plan and gives the employer complete discretion on whether to make an annual contribution.
These examples illustrate the different types of employee benefit plans that companies can offer to their employees. These plans can provide retirement benefits, savings opportunities, and other incentives to attract and retain employees. Employers may also receive tax benefits for offering these plans.