Defined contribution plans may be an option for employers who wish to control the costs of contributing to certain benefits.
In a defined contribution strategy, the employer can designate a specific amount to contribute to a special account allocated for each qualified employee. These funds are tax-deferred, meaning that the employer has the benefit of a tax shelter, while the employee pays tax once they are distributed. Examples include 401(k) or 403(b) plans, employee stock ownership plans, and profit-sharing plans.
In short, the company sets aside a certain amount of money each year to benefit the employee. This is often a percentage figure. Ultimately, there is no way to know how much will be contributed to the employee at the time of retirement. While the amount contributed remains fixed, the actual benefit amount is not set.
Upon entering into any type of retirement or benefit agreement, the employee should have details about the percentage of contribution being made and information on plan governance. There are restrictions within the agreement describing how and when funds can be withdrawn without penalty by the employee. The same goes for defined contributions for the purposes of health care: employees may be required to document their use of these funds by providing receipts for expenditures at the end of the plan year.
For more information on defined contribution plans, refer to the U.S. Dept. of Labor.