Page 189 - Group Insurance and Retirement Benefit IC 83 E- Book

but cash balance plans do get such insurance because they, like all ERISA-defined benefit

plans, are covered by the PBGC.

Plans may also be either employer-provided or individual plans. Most types of retirement

plans are employer-provided, though Individual Retirement Accounts (IRAs) are very
common.

Tax advantages

Most retirement (the exception being most non qualified plans) plans offer significant tax
advantages. Most commonly the money contributed to the account is not taxed as income

to the employee, but in the case of employer provided plans, the employer is able to

receive a tax deduction for the amount contributed as if it were regular employee
compensation. This is known as pre-tax contributions, and the amounts allowed to be

contributed vary significantly among various plan types. The other significant advantage
is that the money in the plan is allowed to grow through investing without being taxed on

the growth each year. Once the money is withdrawn it is taxed fully as income. There are

many restrictions on contributions, especially with 401(k) and defined benefit plans that
are designed to make sure that highly compensated employees do not gain too much tax

advantage at the expense of lesser paid employees.

Currently two types of plan, the Roth IRA and the newly introduced Roth 401(k), offer

tax advantages that are essentially reversed from most retirement plans. Contributions to
Roth IRAs and Roth 401(k)s must be made with money that has been taxed as income,

but after meeting the various restrictions, money withdrawn from the account is tax-free.

EGTRRA and later changes

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought

significant changes to retirement plans, generally easing restrictions on the ability to roll

money from one type of account to the other and increasing contributions limits. Most of
the changes were designed to phase in over a period of 4–10 years. Unless they are

extended, it will "sunset," or revert, at the end of 2010 to the previous laws.