3726 / What special qualification requirements apply to defined contribution plans?

A defined contribution plan must contain a limitation on the amount of “annual additions” that may be credited to a participant’s account each year, or, if an employer has more than one plan, to all accounts of all defined contribution plans of the employer ( Q 3728, Q 3868). The plan must require a separate accounting for each employee’s benefit under the plan.¹

A defined contribution plan may not exclude from participation in the plan employees who are beyond a specified age.²

Hybrid plans, which combine the features of defined contribution plans and defined benefit plans, are treated as defined contribution plans to the extent that benefits are based on the individual account. One type of hybrid plan is the target benefit plan ( Q 3734). The participant’s target benefit is calculated according to a formula, and an actuary determines the contribution necessary to reach this target by retirement age. This amount is allocated to the participant’s account.

A defined contribution plan must provide for (1) allocation of contributions and trust earnings to participants in accordance with a definite formula, (2) distributions in accordance with an amount stated or otherwise ascertainable and credited to participants, and (3) a valuation of investments held by the trust, at least once a year, on a specified inventory date, in accordance with a method consistently followed and uniformly applied.³ The third requirement may be satisfied in a plan where contributions are invested solely in insurance contracts or in mutual fund shares even if there is no provision in the plan for periodic valuation of assets.⁴

A defined contribution plan will not fail to satisfy the participation, coverage, and vesting requirements merely because it does not unconditionally provide for an allocation to a participant with respect to a computation period in which he or she completes 1,000 hours of service ( Q 3841, Q 3869). Thus, for example, a plan may require that a participant be employed as of the last day of a computation period to receive an allocation.⁵ This provision will not violate nondiscrimination requirements ( Q 3848).

A money purchase pension plan or a profit sharing plan will not be qualified unless the plan designates the type of plan it is.⁶ The IRS has ruled that amounts transferred or directly rolled over from a money purchase pension plan to an otherwise qualified profit sharing plan must continue to be subject to the restrictions on money purchase pension plans. In the absence of such restrictions, the profit sharing plan would fail to qualify under IRC Section 401(a).⁷