3725 / What is a defined contribution plan?

The IRC permits two types of tax qualified plans: defined contribution plans, and defined benefit plans.

A defined contribution plan is characterized by two elements: 1) each participant has an individual account, and 2) all benefits are provided solely from the accumulated value of those accounts based on amounts contributed by employee and employer, forfeiture reallocation and accruals, plus income, expenses, gains and losses (e.g., 401(k) plan).¹ Defined contribution plans contain a formula for determining the amount of the contribution or how a discretionary contribution to the plan is allocated to each participant’s
account.

A defined contribution plan can be either a pension ( Q 3733) or a profit sharing plan ( Q 3749). Profit sharing, age weighted and cross-tested profit sharing plans include 401(k) plans ( Q 3752), stock bonus plans ( Q 3816), and employee stock ownership plans ( Q 3817). Pension plans include money purchase and target benefit plans ( Q 3734).

See Q 3728 for the application of the Section 415 limits to defined contribution plans and Q 3726 for special qualification requirements.