Defined Contribution

In this type of defined contribution plan, the employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage

A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The employer contributions in safe harbor 401(k) plans are immediately 100 percent vested. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the complex tax rules ordinarily applied to traditional 401(k) plans. The employer can match each eligible employee’s contribution or make a 3 percent nonelective contribution. Each year the employer must make either the matching contributions or the nonelective contributions. The plan document will specify which contributions will be made and this information must be provided to employees before the beginning of each year.

A profit sharing plan allows the employer each year to determine how much to contribute to the plan (out of profits or otherwise) in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants.

A money purchase pension plan allows the employer each year to contribute to the plan in cash or employer stock. The plan contains a formula for allocating the annual contribution among the participants. The employer is required to make a contribution each year.