501(c)18 Plan: A Comprehensive Guide to This Specialized Retirement Savings Account

Before 401(k) plans, there were 501(c)18 plans offered by employers to employees in select industries. These plans, which started in the 1950s, are still around today.

“A 501(c) plan is a lesser-known, specialized retirement savings account primarily used by employees in certain unionized industries. It predates modern retirement plans like 401(k)s and is structured as a tax-exempt trust,” says Daniel Milks, a certified financial planner and founder of Fiduciary Organization.

Key Takeaways

• A 501(c)18 plan is a specialized employee pension benefit plan used in niche fields such as union trades.
• Contributions are made after taxes, and the money in the plan grows tax-deferred.
• Once in retirement, distributions are taxed as ordinary income.

What Is a 501(c)18 Plan?

A 501(c)18 plan is a type of trust that forms part of an employee pension benefit plan. To qualify for tax-exempt status, a 501(c)18 plan must:

• Have been created before June 25, 1959
• Be a valid, existing trust under local law
• Be evidenced by an executed written document
• Be funded solely from contributions by employees who are members of the plan

How Contributions Work

There are no upfront tax savings with contributions to a 501(c)18 plan.

“(Contributions) are typically made by employees on an after-tax basis, meaning there’s no immediate tax deduction for contributions,” Milks says.

Interaction With Other Retirement Plans

Because contributions are made after taxes, 501(c)18 contributions won’t impact contribution limits on other retirement plans.

“Unlike traditional retirement accounts, a 501(c)(18) plan is rarely an employee’s primary savings vehicle. Since contributions are made after-tax, they don’t affect 401(k) or IRA contribution limits, allowing savers to diversify their tax treatment across different accounts,” Milks says.

Tax Implications

One tax advantage of a 501(c)18 plan is money in the plan grows tax-deferred.

“While contributions are not tax-deductible, the growth within the plan remains tax-deferred, and distributions in retirement are typically taxed as ordinary income,” Milks says.

Niche Retirement Plan

A 501(c)18 plan is a specialized retirement plan only found in select fields and trades. According to the Internal Revenue Service, 501(c)18 plans were created before June 25, 1959. Because these trusts were formed so long ago, a newer organization isn’t likely to apply or get this status.

“Most workers today won’t encounter a 501(c)(18) plan unless they’re in a niche field where these plans were historically used, such as certain unionized trades,” Milks says.

Can You Roll Over a 501(c)18 Plan?

A 501(c)18 plan cannot be rolled over into an individual retirement account or 401(k) plan.

“These plans are structured differently from traditional retirement accounts and are funded with after-tax contributions, meaning they don’t have the same rollover provisions as tax-deferred accounts,” Milks says.

How Soon Can You Make Withdrawals From a 501(c)18 Plan?

Withdrawals from a 501(c)18 plan are meant for retirement and may be made without penalty when the participant reaches age 59½.

“Withdrawals typically follow similar rules to other retirement accounts, meaning funds are intended for retirement use,” Milks says. “While specific rules may depend on the plan structure, early withdrawals (before age 59½) could be subject to income tax and potential penalties unless an exception applies. Since contributions are made with after-tax dollars, only the investment growth portion may be taxable upon withdrawal.”

How Do Terms in Union Contracts Affect 501(c)18 Plans?

“Some union contracts include negotiated terms for 501(c)18 plans such as mandatory contributions or employer-matching provisions, and there may be specific vesting schedules or restrictions when funds can be accessed,” Milks says.

The Bottom Line

Begun in the 1950s, 501(c)18 plans continue to serve as tax-exempt retirement trusts for employees in specialized trades. Contributions to 501(c)18 plans are made with after-tax dollars, and the money an employee puts into the plan grows tax-deferred. Plan distributions made by employees in retirement are taxed as ordinary income. Union contracts may set terms for 501(c)18 plans, including employer-matching contributions, mandatory contributions, and vesting schedules.