Define: Defined Contribution Plan

A defined contribution plan is a type of retirement plan where the employer and/or employee contribute a set amount or percentage of the employee’s salary into an individual account. The ultimate retirement benefit is based on the contributions made and the investment performance of those contributions.

Unlike a defined benefit plan, where the retirement benefit is predetermined based on factors such as salary and years of service, a defined contribution plan does not guarantee a specific benefit amount. Instead, the benefit is determined by the contributions made and the investment returns.

In most cases, employees are allowed to contribute to their defined contribution plan through salary deferrals. However, there may be limits on the amount that can be contributed each year, as determined by the Internal Revenue Service (IRS).

Employers have the ability to change the contribution amount to a defined contribution plan, as long as they comply with any legal requirements and provide proper notice to employees. However, any changes made should be consistent with the terms of the plan and applicable employment laws.

When changing jobs, you typically have several options for your defined contribution plan. You can leave the funds in the plan, roll them over into a new employer’s plan, roll them over into an individual retirement account (IRA), or cash out the funds (subject to taxes and penalties).

Yes, there are tax advantages to participating in a defined contribution plan. Contributions made by employees are typically made on a pre-tax basis, meaning they are not subject to income tax until withdrawn. Additionally, any investment earnings within the plan are tax-deferred until withdrawn.

Some defined contribution plans allow participants to take loans from their account balance. However, there are specific rules and limitations set by the plan and the IRS. It is important to consult the plan documents and speak with a financial advisor before considering a loan.

In general, withdrawals from a defined contribution plan before reaching the age of 59½ may be subject to income tax and an additional 10% early withdrawal penalty. However, there are certain exceptions, such as financial hardship or disability, that may allow for penalty-free withdrawals.

Yes, you can contribute to both a defined contribution plan and an IRA, as long as you meet the eligibility requirements for each. However, there may be limitations on the tax deductibility of IRA contributions depending on your income and participation in an employer-sponsored plan.

If your employer goes bankrupt, the assets in your defined contribution plan are typically held in a trust separate from the employer’s assets. This means that the plan’s assets should be protected and available for distribution to participants, even in the event of the employer’s bankruptcy. However, it is important to review the specific terms of your plan and consult with a legal professional if necessary.