What is an Employee Savings Plan?

An employee savings plan is a type of investment account. An employer creates this type of account and then allows his employees to make contributions to it on their own behalf. Through such a plan, employees have the opportunity to contribute a portion of their pre-tax earnings to saving toward long-term goals. For example, a person who is eligible to contribute to an employee savings plan may save toward eventual retirement, paying for his offspring's college education, buying a own home, or even taking a dream vacation around the world. In some cases, employers may also contribute to these plans, matching part of their employees' contributions.

Employers are not typically required to offer their employees the chance to contribute to an employee savings plan. This type of account is normally entirely optional. Often, employers create these accounts as part of the benefit package they maintain for the purpose of attracting qualified workers and encouraging them to stay with their company. For example, this type of plan may be offered as part of a benefit package that includes such benefits as vacation time, personal days, and medical and dental benefits.

Typically, an employee's contribution to an employee savings plan is withdrawn directly from his paycheck before he even sees the money and before it is taxed. Many companies allow employees to make after-tax contributions as well, however. Employees are typically fully vested in this type of plan. In some cases, however, an employer may stipulate that employees have to wait for a period of time before they can be fully vested in the contributions the employer makes to withdraw the matched funds.

One primary benefit of an employee savings plan is that it allows employees to invest money and save on taxes. Since they are allowed to make pre-tax contributions, their investments can decrease their taxable income and lower the amount of taxes that are withheld from their paychecks. Withdrawals are, however, subject to the applicable taxing laws in the region.

Often, people confuse an employee savings plan with a 401K retirement plan. The two are not the same, though both may be offered as part of an employee benefit package. With a 401K plan, the company chooses one plan and the employees can contribute to it. The owners or the company's board of directors typically have the job of voting to make decisions for this plan. With an employee savings plan, on the other hand, an employee is allowed to choose the investment portfolio he wants to invest in as well as how it is managed.