Defined Contribution Plan

Under a discretionary profit sharing plan, the employer contributes to the plan periodically on behalf of eligible employees. The employer may vary the amount of contribution from year to year or may eliminate a contribution entirely in certain years. As a general rule, however, discretionary profit contributions must be "substantial and reoccurring."

As contributions are made to the plan, they are allocated among participating employees. The method of allocation is defined by a formula stated in the plan. The most common and straightforward method of allocation is in direct proportion to an employee's compensation; however, other methods of allocation, recognizing factors such as age or the employer's contributions to federal social security may be used.

An account is maintained on behalf of each participant in the profit sharing plan. This account most often represents the employee's share of general trust fund assets, although in some plans individual accounts are actually segregated and invested in funds chosen by each participant.