Page 179 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
Defined Contribution Plan. This is a plan in which the employer is
liable for a payment into the plan of a specific size, but not for the size
of the resulting payments from the plan to participants. Thus, the par-
ticipant bears the risk of the results of investment of the monies that

have been deposited into the plan.The participant can mitigate or increase
this risk by having control over a number of different investment options.
The annual combined contribution to this type of plan by both the
participant and employer is limited to the greater of $35,000 or one-
fourth of a participant’s compensation (though this is restricted in several
cases—see the following specific plan types). Funds received by partic-
ipants in a steady income stream are taxed at ordinary income tax rates,

and cannot be rolled over into an IRA, whereas a lump-sum payment
can be rolled into an IRA. Some of the more common defined con-
tribution plans are as follows:
• 401(k) plan. This is a plan set up by an employer into which
employees can contribute the lesser of $11,000 or 15 percent
of their pay, which is excluded from taxation until such time
as they remove the funds from the account. All earnings of
the funds while held in the plan will also not be taxed until
removed from the account. Employers can also match the
funds contributed to the plan by employees, and contribute
the results of a profit sharing plan to the employees’ 401(k)
accounts. The plan typically allows employees to invest the
funds in their accounts in a number of different investment
options, ranging from conservative money market funds to
more speculative small cap or international stock funds; the
employee holds the risk of how well or poorly an investment
will perform—the employer has no liability for the perform-
ance of investments.Withdrawals from a 401(k) are intended
1
to be upon retirement or the attainment of age 59 /2, but can
also be distributed as a loan (if the specific plan document
permits it) or in the event of disability or death.

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