Defined contribution pension plans provide an individual account for each participant and provide benefits that are based on (a) amounts contributed to the participant's account by the employer or employee, (b) investment experience, and (c) any forfeitures allocated to the account, less any administrative expenses charged to the plan. These plans, which are discussed in more detail in chapter 3 of the AICPA Audit and Accounting Guide Employee Benefit Plans, include (a) profit-sharing plans, (b) money purchase pension plans, (c) stock bonus and employee stock ownership plans (ESOPs), (d) thrift or savings plans including 401(k) arrangements, and (e) certain target benefit plans.
Under a defined contribution plan the employer contribution rate is generally determined periodically at the discretion of the employer or by contractual agreement, or both. When a participant retires or withdraws from the plan, the amount allocated to the participant's account (if fully vested) represents the participant's accumulated benefits. That amount may be paid to the participant or used to purchase a retirement annuity. The amount of benefits a participant will ultimately receive is generally not determined until the time of payment. By contrast, in a defined benefit plan, benefits are determinable and the contribution necessary to provide those benefits is actuarially determined. In other respects, defined contribution plans are similar to defined benefit plans.
· Types of Defined Contribution Pension Plans
· Accounting and Reporting by Defined Contribution Pension Plans
· Frequently Asked Questions
- Applicable to all plans