Describe the Essential Features of Defined Contribution Plans

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The Answer is The annual contribution to a defined contribution plan is usually defined as a percentage of the compensation of plan participants. For a money purchase plan, a legal document establishing the plan describes the percentage of compensation which the employer (business) is required to contribute. Allocations to all other plans (except target benefit) are determined by a formula. Federal regulations limit the maximum tax-deductible contributions which a business can make to a defined contribution plan. The annual addition to each participant's account is comprised of the employer's contribution, any employee contribution, and any forfeiture allocation. The maximum limits under different types of plans (except SEP plans) are as follows:

\begin{array}{lr} ext { Money Purchase }& ext { Lesser of } 100 \% ext { of compensation, }\& ext { or } \$ U S 50,000 ext { as indexed (2015) }\ ext { Profit Sharing } & ext { same } \ ext { Target Benefit } & ext { same } \ ext { Money Purchase and Profit Sharing } & ext { same }\end{array}

Money Purchase and Profit Sharing same
While during any given year the maximum annual addition for certain employees in a profit sharing plan could be as much as 100 percent of their compensation or $50,000 (2015), whichever is less, the overall annual addition is limited to 25 percent (2015) of the total compensation of all employees of the corporation.
Except for a profit sharing plan, the plan document defines the amount of the employer's contribution to be allocated to each participant's account. Each participant in a defined contribution plan is considered to have an individual account. Every year, all investment data for the plan for its 12-month period is reviewed. The gain or loss of the plan's assets is calculated and allocated among the individual participant accounts. The benefit which a participant receives at retirement or termination is the current value of the account in which the participant has a vested interest. The value of the account is the sum of the annual contributions made to the account, its share of the forfeitures, and its share of the investment return of the plan assets.
Defined contribution plans have certain basic characteristics which are common to all plans included in this category. For instance, the contribution to be made, as defined in the plan document, is usually defined as a percentage of compensation. In addition, the value of a participant's individual account is the benefit to be paid out at the time of retirement or termination. However, each type of defined contribution plan has its own unique characteristics.

Describe the Essential Features of Defined Contribution Plans

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