Defined-Contribution Plans

The Internal Revenue Code recognizes three mutually exclusive categories of qualified defined-contribution plans:

1. Pensions (primarily money purchase plans), which have mandatory contribution formulas.⁽¹⁾
   
   
2. Profit-sharing plans, which have discretionary contribution formulas and distribute benefits strictly in cash. Profit-sharing plans can, in turn, be informally subdivided into three groups:
   
   
   • True profit-sharing plans, which have a nonbinding formula linking contributions to profits;
     
     
   • Savings and thrift plans, which have a nonbinding formula linking employer contributions to employee contributions; and
     
     
   • Nominal profit-sharing plans, which have no formula at all.
     
     
3. Stock plans, which differ from profit-sharing plans only in that beneficiaries can demand payment in the form of the employer's securities.

Each type of plan can be further broken down by whether it offers a 401(k) feature; that is, whether it allows employees to make tax-deferred contributions to the plan. Although the vast majority of 401(k) plans are savings and thrift plans, money purchase plans and stock plans can also offer that feature.

Employers must establish parameters for the plan that are not directly related to the sources of contributions, including:

• Whether to accept rollovers from other plans;
  
  
• How much control to give employees over their investments;
  
  
• The distribution options offered at retirement; and
  
  
• Whether to allow loans and hardship withdrawals.

Unlike defined-benefit plans, defined-contribution plans need not address the issue of death and disability benefits, since the balances in participants' accounts are always available to them or to their survivors in such cases.

Employers offering nonqualified defined-contribution plans have varying degrees of discretion in customizing their plans. For customization options see:

• 403(b) plans,
  
  
• 457 plans,
  
  
• The Federal Thrift Savings Plan,
  
  
• SIMPLEs, and
  
  
• SEPs.