Employee Contribution Plan

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.

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