Defined Contribution Plans | Campbell Albrecht

DC Plan Overview

Employer/Employee contributions and employee distributions are defined
Contribution limits, tax deduction limits, and other factors can change annually
Future retirement benefits cannot be predicted due to variability
Individual employee accounts can grow via contributions, investment earnings, and, in some cases, forfeitures
Employees can contribute on a before- and/or after-tax basis in some plans
Employer account balances may be subject to a vesting schedule
Non-vested account balances of former employees can be used to reduce employer contribution or can be allocated to active participants

Generally the most flexible qualified plan
Company contributions (if any) are discretionary and decided annually
Contributions are usually allocated in proportion to compensation and may be affected by social security, resulting in larger contributions for higher-paid employees
Amounts contributed to the plan accumulate tax deferred and are distributed to participants after a fixed number of years or upon a specific event such as retirement, disability, death, or termination of employment

May use an allocation formula that considers each employee’s age and compensation, resulting in significantly larger allocations to employees closer to retirement age
Combine the flexibility of a profit sharing plan with the ability of a pension plan to provide benefits in favor of older employees

The most popular type of retirement plan today
Employees can benefit even if the employer makes no contribution
Employees can voluntarily elect to make pre-tax contributions through payroll deductions up to an annual maximum limit
May permit employees age 50 and older to make additional "catch-up" contributions, up to an annual maximum
Employee contributions are 100% vested at all times
May permit employees to make after-tax Roth contributions through payroll deductions instead of pre-tax contributions to receive tax-free distributions
Employers often match some portion of the amount deferred by the employee in order to encourage greater employee participation
This is a type of profit sharing plan, so profit sharing contributions may be made in addition to, or instead of, matching contributions
Hardship withdrawals and borrowing from the plan is often possible
Employee and employer matching contributions are subject to special nondiscrimination tests

Can be designed to eliminate nondiscrimination testing, which allows Highly Compensated Employees to defer up to the annual limit without concern for how much Non-Highly Compensated Employees defer

Usually profit sharing plans that are tested for nondiscrimination as though they were defined benefit plans — certain employees may receive much higher allocations than would be permitted by standard nondiscrimination testing
Generally utilized by small businesses to tailor contribution amounts for specific employees
Employees are divided into groups based on business classifications, e.g., owners and non-owners. Each group may receive a different contribution percentage