Employee Contribution Plan

AAA

DEFINITION of 'Employee Contribution Plan'

A company-sponsored retirement plan where employees may elect to have a portion of each paycheck deposited into a retirement account owned by the employee and held in his or her name. Employee contribution plans are subject to annual contribution limits imposed by the federal government, but often have tax benefits such as deferred taxes on investment gains and the ability to contribute pre-tax income. Employees always own 100% of the contributions they make. Some companies match employee contributions up to a specified limit, but the employee may not own the entire matching contribution until it fully vests after several years of continued employment.

INVESTOPEDIA EXPLAINS 'Employee Contribution Plan'

Defined contribution plans such as 401(k)s are a type of employee contribution plan. Unlike a defined benefit plan, where the employer pays the employee a predetermined amount of benefits during retirement, a defined contribution plan's payout is based on how much money the employee contributes, whether the employer matches a percentage of those contributions, how the employee chooses to invest the money in that plan and how those investments perform over time. Employee contribution plans shift investment risk from the employer to the employee.

RELATED TERMS
  1. Employment Agency Fees

    An employment agency works to match employers with suitable employees. ...
  2. Retirement Contribution

    A monetary contribution to a retirement plan. Retirement contributions ...
  3. Break In Service

    The loss of use of the contribution or benefit plan of the corporation ...
  4. 401(a) Plan

    A money-purchase retirement savings plan that is set up by an ...
  5. Employee Savings Plan

    A pooled investment account provided by an employer that allows ...
  6. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
RELATED FAQS
  1. I am 61 years old and would like to contribute to my employer's 401(k) plan. Is there ...

    There is no age limit. As long as you are still employed by the company that sponsors the 401(k) plan, you may participate ...
Related Articles
  1. Entrepreneurship

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  2. Economics

    America's Most Notorious Corporate Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  3. Investing

    Corporate Governance

    Corporate governance refers to the formally established guidelines that determine how a company is run. The company’s board of directors approves and periodically reviews the guidelines, which ...
  4. Investing Basics

    Enterprise Resource Planning System: A How To

    An ERP system won’t transform poor management into good management, but the real-time business analytics can help make good management even better.
  5. Investing Basics

    How To Calculate Goodwill

    Goodwill is an intangible, but it is still possible to effectively calculate or estimate goodwill for a company.
  6. Economics

    How does Outsourcing Work?

    Outsourcing is the business practice of hiring people outside a company to perform services that traditionally were performed within the company, by the business’s own employees. Companies typically ...
  7. Investing Basics

    Using Appreciative Inquiry To Solve Management Problems

    In its purest form, appreciative inquiry is a powerful tool for shifting the focus of an organization to something much greater than its bottom line - although the eventual outcome will often ...
  8. Investing Basics

    The Basics Of Value Chain Analysis

    Value chain analysis establishes an action plan to understand and implement actvities that create values to a firm's clients, resulting in firm profits.
  9. Professionals

    10 Steps On The Career Ladder

    The job market has recovered enough, and people who had to scuffle to find a job can now start thinking about their next career move.
  10. Investing Basics

    Top Tools for ERP Enterprise Resource Planning

    Top tools used in Enterprise Resource Planning with its characteristics - Explaining the main tools companies use when using Enterprise Resource Planning appraoch

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center