An elective deferral agreement, also known as a salary reduction agreement, is a type of employee benefit plan that allows a participant to contribute a portion of their salary to an employer-sponsored retirement account. Elective deferral agreements are commonly used in 401(k) and 403(b) retirement plans.
The purpose of an elective deferral agreement is to allow employees to save for retirement on a tax-deferred basis. By contributing a portion of their salary to a retirement account, participants reduce their taxable income and defer paying taxes on those contributions until they withdraw the money from their account in retirement. This can provide significant tax benefits and help participants save more money for retirement.
Employers can also benefit from elective deferral agreements. By offering these plans, employers can attract and retain top talent by providing a valuable employee benefit. Additionally, many employers offer matching contributions to encourage employees to participate in the plan and save more for retirement.
To participate in an elective deferral agreement, an employee must complete a salary reduction agreement with their employer. This agreement specifies the percentage or amount of their salary they would like to contribute to their retirement account. The amount that can be contributed depends on the type of plan and the IRS contribution limits for that year.
It’s important for employees to understand the terms and conditions of their elective deferral agreement, including the vesting schedule and any matching contributions offered by their employer. Vesting schedules determine when employees are entitled to the employer’s contributions, and can vary from immediate vesting to a multi-year schedule.
In conclusion, an elective deferral agreement is a valuable employee benefit that allows participants to save for retirement on a tax-deferred basis. Employers can also benefit from offering these plans by attracting and retaining top talent. It’s important for employees to understand the terms and conditions of their plan to make the most of this valuable benefit.