An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms


What Is an Annuity?

An annuity is a long-term contract with an insurance company that guarantees the employee a steady stream of income at a future date, most frequently after retirement.

How Does an Annuity Work?

Annuities are a way to save additional money for retirement. Annuity contracts require employees to make a series of payments in exchange for income paid out on a regular basis. An annuity contract can be purchased independently, or employees may receive one through their employer.

What Are the Common Types of Annuities?

The payments you make in an annuity contract are generally fixed (you received a definite amount of pay) or variable (you receive various amounts of pay).

There are several types of annuities, such as:

What Is a Qualified Employee Annuity?

A qualified employee annuity is a retirement savings plan purchased by an employer for their employee. Qualified annuities are funded with pre-tax dollars, meaning there are no taxes owed on money that accrues in the account, given that no withdrawals are made.

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What Are the IRS Requirements for an Employee Annuity?

Per IRS standards, there are qualified and non-qualified employee annuities. The IRS requirements for an employee annuity are as follows:

For more information, see the IRS Publication 575 for all rules on qualified and non-qualified annuities.

Annuity vs. 401K

Annuities and 401(k)s are two popular retirement savings options. Though they share similarities (like offering tax-deferred growth), there are key differences you should know to provide the right benefits to your employees.

Here are the main differences between an annuity vs 401(k):

Choosing Whether to Offer Qualified Employee Annuities

Although annuities offer a guaranteed stream of retirement income, not many organizations offer annuities as a traditional investment option. For example, a 2017 employee benefits survey reported that only 9% of HR professionals offer in-plan annuities.

This is typically because there are hurdles and complexities employers face with annuities, such as:

While some employers do offer annuities as a central part of their retirement plans (they automatically enroll new employees unless they choose to opt out), the majority are not yet ready to offer annuities to their employees.

Therefore, it’s crucial to dive into research to navigate and negotiate lower investment fees to provide the best possible annuity benefits. If a company’s workforce is large enough, negotiations can be much easier to initiate.