A retirement plan in which the employee and/or employer contribute a set dollar amount each month. The benefits of a defined contribution plan are not set, and depend upon how well the contributions are invested before the pensioner starts to make withdrawals. The disadvantage of a defined contribution plan is the possibility that the investments will not perform as well as expected, giving the pensioner a less secure retirement. The advantage is that the pensioner, while still making contributions, has the ability to determine how the contributions are invested, at least to a certain extent. See also: 401(k).
In a defined contribution retirement plan, the benefits -- that is, what you can expect to accumulate and ultimately withdraw from the plan -- are not predetermined, as they are with a defined benefit plan.
Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is.
One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices.
An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer's plan if the plan accepts transfers.
Under an account balance plan, however, the present value is generally the amount credited to the participant's account-including the principal amount and any credited earnings or losses-provided that earnings and losses are credited at least annually.
Under the regulations, the manner in which the amount deferred for a period is determined depends upon whether the nonqualified deferred compensation plan is an account balance plan or a nonaccount balance plan.
In the Todd survey, 11% of the companies subscribe to an account balance plan.
Further, even if additional credits to a participant's account under an account balance plan are denominated as income and do not exceed the permissible amount, they will not be treated as income exempt from FICA taxation if the amounts with respect to which they purport to be income have not actually been taken into account for FICA tax purposes.
An account balance plan establishes a separate account for each employee, with the employer contributing a specific amount (usually based on a percentage of pay) to each account.
Pursuant to the property settlement incorporated into their divorce judgment, A transferred to B (1) one third of the nonstatutory stock options; (2) the right to receive deferred compensation payments under the account balance plan based on 75% of A's account balance under the plan; and (3) the right to receive a single-sum payment of $25 under the other deferred compensation plan on A's termination of employment.
For an account balance plan, deferrals and earnings are credited to an account in the employee's name.
Although the regulations generally require the benefit in an account balance plan to be based on the account's balance, Regs.
For example, if an account plan has several distribution options, the plan may be treated as an account balance plan and, therefore, a reasonable FICA amount may be calculated, if the options are actuarially equivalent.
An account balance plan is a plan that credits an income amount equal to the original amount deferred in periods subsequent to the deferral period.
A plan will be deemed an account balance plan if under the terms of the plan, a principal amount (or amounts) is credited to an individual account for an employee, the income attributable to each principal amount is credited or debited to the individual account, and the benefits payable to the employee are based solely on the balance credited to the individual account.
From the sponsor's perspective, the account balance plan is similar to a defined benefit, career pay pension plan; participants' benefits are based on compensation earned during each year of their career.