Jeffrey L. Offhaus
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Audit Requirements and ResponsibilitiesLimited-Scope AuditsDefined Benefit Pension PlansDefined Contribution Pension Plans Health and Welfare Benefit Plans
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"Employee benefit plans are regulated entities and, as such, certain special audit requirements and responsibilities generally apply."

About Defined Contribution Pension Plans

Defined contribution pension plans provide an individual account for each participant and provide benefits that are based on (a) amounts contributed to the participant's account by the employer or employee, (b) investment experience, and (c) any forfeitures allocated to the account, less any administrative expenses charged to the plan. These plans include (a) profit-sharing plans, (b) money purchase pension plans, (c) stock bonus and employee stock ownership plans (ESOPs), (d) thrift or savings plans including 401(k) arrangements, and (e) certain target benefit plans.

Under a defined contribution plan the employer contribution rate is generally determined periodically at the discretion of the employer or by contractual agreement, or both. When a participant retires or withdraws from the plan, the amount allocated to the participant's account (if fully vested) represents the participant's accumulated benefits. That amount may be paid to the participant or used to purchase a retirement annuity. The amount of benefits a participant will ultimately receive is generally not determined until the time of payment. By contrast, in a defined benefit plan, benefits are determinable and the contribution necessary to provide those benefits is actuarially determined. In other respects, defined contribution plans are similar to defined benefit plans.

Types of Defined Contribution Pension Plans

There are three general types of defined contribution pension plans:  profit-sharing plans, money purchase pension plans, and stock bonus plans.

Profit Sharing Plans – A profit sharing plan is a defined contribution plan that is not a pension plan (as defined in the IRC) or a stock bonus plan. Employer contributions may be discretionary or may be based on a fixed formula related to profits, compensation, or other factors. A profit-sharing plan must be designated as such in the plan document.

Money Purchase Pension Plan – A defined contribution plan under which employer contributions are based on a fixed formula that is not related to profits and that is designated as a pension plan by the plan sponsor.

Stock Bonus Plan – A stock bonus plan is a defined contribution plan under which distributions are normally made in stock of the employer, unless the distributee elects otherwise.
A number of more specialized plans exist that are included in the three general types of plans, including:

  • Cash-or-Deferred Arrangement (Also Called a Section 401(k) Plan). These plans may be incorporated into a profit-sharing or stock bonus plan. Under such an arrangement, a participant is permitted to elect to receive amounts in cash or have them contributed to the plan as employer contributions on the participant's behalf.
  • 403(b) Plan. A 403(b) plan is a retirement savings arrangement sponsored by certain not-for-profit organizations (such as hospitals and private colleges) and public schools. They are defined contribution plans with individual salary deferral limits that are similar, but not identical to, 401(k) plans.
  • Thrift Plan (Also Called a Savings Plan). A thrift plan is a profit-sharing or stock bonus plan under which participants make after-tax employee contributions that are usually matched, in whole or in part, by employer contributions.
  • Employee Stock Ownership Plan (An ESOP). A stock bonus plan that may borrow money from, or on the guarantee of, a related party (a party in interest as defined in section 3(14) of ERISA) for the purpose of acquiring securities issued by the plan sponsor and that invests primarily in such securities (a leveraged ESOP). The term employee stock ownership plan is also generally applied to (a) nonleveraged stock bonus plans.