Defined contribution plan

(redirected from Account Balance Plan)

Defined contribution plan

A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Defined Contribution Plan

A retirement plan in which the employee and/or employer contribute a set dollar amount each month. The benefits of a defined contribution plan are not set, and depend upon how well the contributions are invested before the pensioner starts to make withdrawals. The disadvantage of a defined contribution plan is the possibility that the investments will not perform as well as expected, giving the pensioner a less secure retirement. The advantage is that the pensioner, while still making contributions, has the ability to determine how the contributions are invested, at least to a certain extent. See also: 401(k).
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Defined contribution plan.

In a defined contribution retirement plan, the benefits -- that is, what you can expect to accumulate and ultimately withdraw from the plan -- are not predetermined, as they are with a defined benefit plan.

Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is.

One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices.

An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer's plan if the plan accepts transfers.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Under an account balance plan, however, the present value is generally the amount credited to the participant's account-including the principal amount and any credited earnings or losses-provided that earnings and losses are credited at least annually.
Under the regulations, the manner in which the amount deferred for a period is determined depends upon whether the nonqualified deferred compensation plan is an account balance plan or a nonaccount balance plan.
* Account Balance Plans. An "account balance plan" is essentially a defined contribution plan - one under which deferred amounts and additional amounts treated as income thereon are credited to a participant's account and the benefit payable from the plan is based solely on the participant's account balance.(7) The section 3121(v) rules for account balance plans are rather straightforward.
An account balance plan establishes a separate account for each employee, with the employer contributing a specific amount (usually based on a percentage of pay) to each account.
Pursuant to the property settlement incorporated into their divorce judgment, A transferred to B (1) one third of the nonstatutory stock options; (2) the right to receive deferred compensation payments under the account balance plan based on 75% of A's account balance under the plan; and (3) the right to receive a single-sum payment of $25 under the other deferred compensation plan on A's termination of employment.
Any plan that is not an account balance plan is a nonaccount balance plan.
To calculate the correct amount of FICA, it is necessary to calculate the "amount deferred." This calculation will vary depending on whether the plan is an "account balance plan" or a "nonaccount balance plan."
For example, if an account plan has several distribution options, the plan may be treated as an account balance plan and, therefore, a reasonable FICA amount may be calculated, if the options are actuarially equivalent.
From the sponsor's perspective, the account balance plan is similar to a defined benefit, career pay pension plan; participants' benefits are based on compensation earned during each year of their career.
Employee and employer account balance plans are defined contribution plans, in which the accrued benefit is the account balance in a defined contribution plan as of a specific date.
Account balance plans: The regulations describe two alternative methods for attributing compensation under account balance plans.
(That regulation aggregates deferred compensation arrangements of the same one of eight "types," that is, elective deferrals to account balance plans, nonelective deferrals to account balance plans, nonaccount balance plans, separation pay plans, in-kind benefits and reimbursements, split-dollar life insurance arrangements, modified foreign earned income arrangements, and stock rights plans.) In addition, an additional tax of 20 percent on such includible amounts applies.