Chapter 14 DC/401(k) Plan Basics

Defined contribution plans are account-based plans. As such, they are in many respects much simpler than defined benefit plans. The participant has an account; contributions—the participant’s own and the employer’s—are credited to that account; also credited to it are earnings/losses on the investment of account assets. Whatever is in the account, at any given time, is the participant’s benefit.

How Contributions Are Determined

The Tax Code makes a distinction between “profit-sharing plans,” under which employer contributions may be discretionary, and “money-purchase plans,” which provide for a fixed rate of employer contributions. In practice, nearly all DC plans are, technically, “profit-sharing plans,” and ...

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