3730 / What are savings and thrift plans, and “side car” accounts?

Savings and thrift plans are defined contribution plans that have employee contributions. The terms generally refer to plans where the employee contributions are made with after-tax employee contributions. These plans were more common before 401(k) plans were introduced, and the Roth after-tax employee contribution to a 401(k) design was added.

Today, some practitioners use these terms also to describe plans where employees make contributions on a pre-tax basis (i.e., 401(k) plans). These plans typically feature employer-matching contributions. The IRC makes no specific provision for these plans, but they may be tax qualified if they meet the requirements for a pension, profit sharing, or stock bonus plan. A savings or thrift plan may qualify as a pension plan unless there are preretirement privileges to withdraw benefits. They frequently qualify as profit sharing plans by providing for employer contributions out of current or accumulated profits.

Note: There is currently some sponsor and vendor focus to find ways to include, administer and encourage so-called after-tax “side car” accounts in connection with their plan structure. Such accounts would allow participants to specifically payroll reduce to save for financial emergencies as well as retirement and thereby avoid making hardship and loan invasions on their retirement savings.