Defined Contribution Plan:
These plans define the contribution a company will make to the plan and how the contribution will be allocated among eligible employees. An employee’s account grows through employer contributions, investment earnings and, in some cases, forfeitures—funds invested into the plan that come from the non-vested accounts of terminated employees. Some defined contribution plans may also permit employees to make contributions on a before- and/or after-tax basis.
In a defined contribution plan, the contributions, investment results and forfeiture allocations vary year-to-year. As a result, the ultimate retirement benefit cannot be predicted. An employee's retirement, death or disability benefit is based upon the amount in his account at the time distribution is paid.
The portion of an employee’s account balance resulting from employer contributions may be subject to a vesting schedule. Non-vested account balances forfeited by terminated employees can be used to reduce employer contributions or can be reallocated to active participants.
In 2013, the maximum annual amount that can be credited to an employee’s account, taking into consideration all defined contribution plans sponsored by the employer, is limited to either 25 percent of compensation or $51,000, whichever is the lesser amount.