Crash Course in Accounting and Financial Statement Analysis, Second Edition

Defined Contribution Plan

The plan allows employers and/or employees to make annual contributions:

• Annual contributions are fixed.

• Retirement benefits are based on the accumulated contributions in individual employee accounts and on their investments returns.

• Contributions are made to individual employee accounts.

• Employees decide which investments their contributions will go toward, based on the choices presented to them by their employers. Accordingly, there is no government protection of their retirement benefits contributions under the defined contribution plans.

In the Real World: Various Defined Contribution Plans Profit-sharing plan Established and maintained by employers, this plan is designed to allow employees to reap benefit from the company’s profits. Contributions to employees are based on company profits and are at the discretion of employers. Stock bonus plan A profit-sharing plan with contributions made in the form of stock. 401K plan A type of profit-sharing plan, allowing employees to contribute a portion of their pretax earnings to their account for withdrawal at retirement. Employers may also choose to make contributions to their employees’ 401K accounts.