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.

BREAKING DOWN '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 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

    What Does Vesting Mean?

    Vesting is the process of accruing non-forfeitable rights.
  3. Economics

    What's a Conglomerate?

    A conglomerate is a corporation that’s comprised of several different independent businesses.
  4. Investing Basics

    Breaking Down Optimal Capital Structure

    An optimal capital structure shows the best balance of debt to equity a company can have in order to minimize its cost of capital.
  5. Term

    What is a Preemptive Right?

    A preemptive right allows select shareholders to buy newly issued shares in their corporation before the general public.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Investing News

    Employee Or Contractor? An On-Demand Economy Problem

    Several on-demand economy startups classify, or classified, their workers as contractors rather than employees. It is an unconventional approach to hiring and has been a hit with venture capitalists ...
  8. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  9. Investing

    3 Ways to Monetize Your Expertise

    Anyone can make money from sharing their knowledge with others.
  10. Economics

    What Does Human Resources Do?

    Human resources (HR) is the department within a company that handles all matters relating to employment.
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 ... Read Full Answer >>
  2. What protections are in place for a whistleblower?

    Whistleblowers can play a critical role in ensuring the compliance, safety, honesty and legal fairness of governments and ... Read Full Answer >>
  3. How do modern companies assess business risk?

    Before a business can assess or mitigate business risk, it must first identify probable or likely risks to its bottom line. ... Read Full Answer >>
  4. Why has emphasis on corporate governance grown in the 21st century?

    Corporate governance refers to operational practices, management protocols, and other governing rules or principles by which ... Read Full Answer >>
  5. What should a whistleblower do if their employer retaliates?

    Although specifically prohibited by employment law, employer retaliation against whistleblowers for exposing employers' wrongdoings ... Read Full Answer >>
  6. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Depreciation

    1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both ...
  2. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  3. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  4. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  5. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  6. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!