Types of Plans

There are two general categories of qualified plans: defined contribution and defined benefit plans.

Defined Contribution Plans

A defined contribution plan is a retirement plan that provides an individual account for each participant. Benefits are based solely on the amount contributed to the participant's account as well as investment gains, expenses, and forfeitures of accounts of other participants that may be allocated to the participant's account. In a defined contribution plan, the contributions are determined by formula and not by actuarial requirements. Plan earnings and losses are allocated to each particpant's account and do not affect the company's retirement plan costs.

Defined contribution plans include the following:

• Profit Sharing Plan
• 401(k) Plan

In a profit sharing plan, the company agrees to make substantial and recurring, but discretionary, contributions. The allocation of the contribution is usually based on participant compensation.

> In an age-based profit sharing plan, both age and compensation are the basis for allocating the employer's contribution.

> In a cross-tested or new comparability profit sharing plan, the contribution percentage formula for one category of participants is greater than the contribution percentage formula for other categories of participants.

A 401(k) plan is a type of profit sharing plan that allows participants to receive contributions in cash or to have them contributed to the plan. This type of plan may also be in the form of a salary reduction agreement. Eligible employees may elect to reduce their current compensation by having these amounts contributed to the plan.

For more information on 401(k) Plans, check out the NASD's Investor Education site.

Defined Benefit Plans

A defined benefit plan is a retirement plan that is not an individual account plan, but rather the participant is promised a monthly benefit at retirement. A typical benefit formula would entitle a participant to a monthly pension for life equal to 30 percent of monthly compensation. The annual contribution is actuarially determined. Forfeitures reduce the company's cost of providing benefits. Certain benefits may be insured by the Pension Benefit Guaranty Corporation.