Salary Reduction Plan

What Does Salary Reduction Plan Mean?

A salary reduction plan is a pension plan that allows employees to allocate a portion of their salaries toward contributions to their retirement accounts. These contributions are typically tax-deferred, making the plan highly appealing to employees. Many of these plans use products like annuities to turn the accumulated contributions into income payments after retirement. In addition to insurance benefits, such pension plans are a common perk that employers offer to their workers.

Insuranceopedia Explains Salary Reduction Plan

Many employers enhance salary reduction plans by matching the employee’s contributions, making them even more attractive. However, these plans can be risky for employees if they choose to invest all of their contributions in the company’s stock. If the company goes bankrupt, employees could potentially lose their retirement savings. As with most financial decisions, diversifying investments is the wisest strategy. Some savers also build separate retirement assets through products like permanent life insurance, which accumulates cash value outside of any employer-sponsored account.