Employment-Based Retirement PlansFormal retirement plans in the United States emerged in the last quarter of the 19th century as the structure of both families and businesses changed (see History of the Employment-Based Retirement System). Not until the 1920s, however, did the Congress begin addressing the tax status of employment-based retirement plans. As a result of legislation passed since that time, employment-based retirement plans now offer employers a way to provide tax-deferred compensation to their employees. As long as employers meet certain requirements, their employees do not have to pay tax on employer contributions to retirement plans when the contributions are made. Furthermore, employees are not taxed on investment income that a retirement fund earns. Instead, the employee pays tax when he or she receives distributions from a plan. The tax deferral allows employees to accumulate more savings than they would if they used regular taxable accounts. Thus, for employees who are inclined to save, a tax-deferred retirement plan is an attractive form of compensation. Employees seeking to attract such workers offer those plans to remain competitive in the labor market. Among private-sector employers, most plans must become "qualified" to receive tax-favored treatment. Certain other plans receive such treatment as well--most prominently, plans sponsored by the federal government but also some plans sponsored by small businesses. Most employment-based plans are sponsored by a single employer, but among the unionized workforce, multiemployer plans are also common. Employers are not required to offer retirement plans to their employees. The likelihood that a private employer will offer such a plan increases with the size of the firm. Approximately 67 percent of the full-time employees in medium-sized and large establishments were covered by some form of plan in 2005; in small establishments, only 37 percent of full-time employees were covered. Virtually all government employees are covered by a retirement plan. Employers can offer their workers two distinct kinds of retirement plans:
Although defined-benefit plans once dominated the retirement landscape, in 2005 they covered only 36 percent of the employees of medium-sized and large establishments and 9 percent of the employees of small establishments. They remain, however, the most common type of plan among government employers. Defined-contribution plans in 2005 covered 53 percent of the employees of medium-sized and large establishments (some employers offer both types of plans) and 32 percent of the employees of small establishments.
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