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A defined contribution plan is one in which the amount of the sponsor's contribution to the plan is expressed as a percentage of the participant's compensation.
Defined contribution plans include both pension and profit sharing plans. The basic difference between a pension and a profit sharing plan is that the contribution to a pension plan is fixed and mandatory whereas the contribution to a profit sharing plan is flexible and discretionary. The types of defined contribution plans are:
401(k) Plans - Elective pre-tax employee contributions
Profit Sharing Plan - Discretionary employer contributions
Comparability Profit Sharing Plans - Contributions allocated based upon class-based formula
Age Based Profit Sharing Plans - Employer contributions allocated based upon age-based formula
Money Purchase Plan - Mandatory employer contributions
Target Benefit Pension Plan - Similar to Defined Benefit Plan, but no guarantee of benefit
Cafeteria Plans - Provides benefits with pre-tax contributions.
As you research the options above, you will note that some of the descriptions refer to an "integrated" plan.
Defined Benefit Plans - Although not a D.C. plan, a defined benefit plan provides each participant a specified benefit at retirement age in the form of an annuity for life or an equivalent single cash payment.
Benefits are definitely determinable and generally related to the participant's compensation and length of service (e.g. monthly pension for life equal to 50 percent of average monthly compensation)
There is no percentage or dollar limit on the amount of the contribution that is deductible, if the benefits are considered non-discriminatory.
Contributions to a defined benefit plan are calculated according to a formula set forth in the plan document.
Defined benefit plans are subject to minimum funding standards.
Excess earnings may offset the employer's funding requirements.
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