What Is a Plan Participant?
A plan participant either contributes into a pension plan or is in a position to receive benefit payments from the plan. It includes a retired person receiving distributions from a pension plan, or a beneficiary or dependent named by a contributing member.
Understanding Plan Participant
A plan participant has the right to receive benefit payments from a pension plan, whether it is a defined benefit or a defined contribution pension plan, as long as the requirements under the plan's contract have been fulfilled. Under most defined benefit pension plans, the member is required to complete a minimum number of years of service in order to qualify for their maximum allowable pension. The tax law definition of an "active participant" to a company plan could include employees not participating in the employer's plan.
Pension Plans for Participants
A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.
In addition to an employer's required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of their current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker’s annual contributions, up to a specific percentage or dollar amount. In common parlance, pension plan often means the more traditional defined benefit plan, with a set payout, funded and controlled entirely by the employer. Some companies offer both types of plans. They even allow employees to roll over 401(k) balances into their defined benefit plans.
Another variation is the pay-as-you-go pension plan. Set up by the employer, these tend to be wholly funded by the employee, who can opt for salary deductions or lump sum contributions, which are generally not permitted in 401(k) plans. Otherwise, they are similar to 401(k) plans, except that they usually offer no company matching contribution.
When a defined-benefit plan is made up of pooled contributions from employers, unions, or other organizations, it is commonly referred to as a pension fund. Run by a financial intermediary and managed by professional fund managers on behalf of a company and its employees, pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Their actions can dominate the stock markets in which they are invested.
Pension funds are typically exempt from capital gains tax. Earnings on their investment portfolios are tax-deferred or tax-exempt.