Salary Reduction Plan

Published: | Updated: January 6, 2018

Definition - What does Salary Reduction Plan mean?

A salary reduction plan is a pension plan that lets employees draw from their salaries to make contributions to their retirement accounts. These contributions are typically tax deferred, which can make them very appealing to employees. Along with insurance benefits, these kinds of pension plans are a common perk that employers provide for their workers.

Insuranceopedia explains Salary Reduction Plan

Many employers will make salary reduction plans even more attractive by matching the employee's contributions. These plans can, however, be risky for the employee if they elect to put all of their contributions into common stock in the company. If they do so and the company goes bankrupt, they could potentially lose their retirement savings. As with most things related to finances, diversifying investments is the wisest strategy.

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