Defined contribution Plans, such as 401(k) plans, may receive periodic contributions from the employer and/or the employee. Defined contribution plans typically pay retirement or termination benefits in a single-sum payment, though many also allow installments or periodic payments. Some also allow participants to receive a portion of their account while actively employed if the participant meets certain conditions. The amount the participant ultimately receives is based on contributions to his or her account and accrued investment income. Unlike defined benefit plans, these benefits are not insured by the PBGC.
A Safe Harbor Plan 401(k) plan has a unique employer contribution feature with
incentives that help all employees save for retirement by requiring companies
to contribute to their employees’ accounts. When employers take this step to
encourage more employees to participate, the IRS offers them “safe harbor” from
the nondiscrimination testing process that is implemented in traditional 401(k)
plans to ensure that highly compensated employees (HCEs) aren’t being favored
over others. A Safe Harbor plan also allows companies to avoid the consequences
of failure, which include expensive corrections, heavy administrative work, and
even refunding 401(k) contributions.
For more information click here
Defined benefit plans promise participants a monthly retirement benefit typically based on the participant’s years of service, compensation and age. Some plans allow participants to receive a single-sum payment upon retirement instead of the monthly payments. These benefits, which are promised by the employer sponsoring the plan, also are insured by a government agency - the Pension Benefit Guaranty Corporation (PBGC).
A catch-up contribution is an additional contribution to a 401(k) plan that can only be made by an employee who is at least 50 years old. Once an employee has hit the plan’s contribution limit or the annual deferral limit of $19,000 (in 2018), he or she may contribute up to $6,000 as a catch-up contribution. Most employers offer this option, and some companies also match a percentage of the catch-up contribution.
A defined contribution plan to which an employer contributes money, usually a portion of the Company's profits, to accounts for its employees.
Vesting refers to the rights of ownership of a 401(k) plan account balance. Any funds contributed by the employee are, under the Employee Retirement Income Security Act of 1974 (ERISA), fully vested—or owned outright by the employee with no risk of forfeiture. However, contributions made by the employer on a worker’s behalf may be subject to a vesting period, which is the amount of time an employee has to work for an employer before earning the rights to the company’s contributions to his or her account. Vesting schedules vary from company to company, and often phase an employee in to full ownership rights over several years. When an employee is fully vested, it means he or she has earned the rights to all of the money an employer has contributed on his or her behalf to the 401(k) plan account.
For example, a company might start contributing to an employee’s 401(k) plan account right after he or she starts participating in the plan. However, if the plan has a one-year vesting requirement, the employee will only have full ownership rights in that money after being employed there for a year. Once the employee works a year, he or she is fully vested in the employer’s contributions already made and going forward.
A required minimum distribution (RMD) is the minimum amount a person must withdraw from a 401(k) plan once that person is retired and 70½ years old. If an employee is still working at age 70½, they may be permitted to delay withdrawing the RMD from the 401(k) until retirement (unless they are a five percent owner of the company sponsoring the plan). If a person does not withdraw the RMD, they will be fined 50 percent of the required amount not withdrawn and will still have to pay taxes on the taxable portion of the full RMD. The amount of each person’s annual RMD is based on the value of the 401(k) plan account at the prior year-end and a distribution period corresponding to the individual’s age (available through the IRS’s life expectancy tables). If a person has more than one 401(k) plan account, he or she must calculate and withdraw the RMD for each account separately.
Depending on the plan’s policy, the employee may be required to pay back the loan right away or pay the remaining amount to an IRA or another plan as a rollover within 60 days.
If an employee can’t repay a loan, the money will be treated as distributed, or withdrawn. The individual will be taxed on the outstanding balance and—unless the employee is at least 59½ years old—may face an early withdrawal penalty.