Quick Answer
A defined contribution plan defines what goes in, not what comes out: the employee gets an individual account, bears all investment risk, and has no PBGC backstop. The 2026 total annual addition limit is $72,000. The main types are 401(k), 403(b), profit-sharing, and money purchase pension plans, each with its own contribution rules.
In contrast to defined benefit plans where the employer guarantees a specific retirement income, defined contribution plans specify what goes in, not what comes out. The employee's retirement benefit depends entirely on how much is contributed and how investments perform.
What Are the Structure and Characteristics?
- Specify the contribution amount (or formula), not the retirement benefit
- The employee bears the investment risk: retirement income depends on investment performance
- Each participant has an individual account
- Maximum annual addition (2026): the lesser of $72,000 or 100% of compensation
- No Pension Benefit Guaranty Corporation (PBGC) insurance (unlike defined benefit plans)
What Are the Types of Defined Contribution Plans?
| Plan Type | Key Feature | Who Contributes |
|---|---|---|
| 401(k) | Employee elective deferrals; employer may match | Both |
| 403(b) | For public schools, 501(c)(3) organizations | Both |
| Profit-sharing | Employer contributes a discretionary portion of profits | Employer |
| Money purchase pension | Employer contributes a fixed percentage of compensation | Employer |
What Are the 401(k) 2026 Limits?
The most common employer-sponsored retirement plan. Employees defer a portion of their salary on a pre-tax (or Roth) basis.
- Employee elective deferral limit: $24,500
- Age 50+ catch-up contribution: $8,000 (total: $32,500)
- Age 60-63 "super" catch-up (SECURE 2.0 Act): $11,250 (total: $35,750)
- Total annual addition limit (employee + employer): $72,000
- Employer matching contributions do not count against the employee's $24,500 deferral limit
SECURE 2.0 Roth catch-up rule: Employees who earned more than $150,000 in Federal Insurance Contributions Act (FICA) wages in the prior year must make catch-up contributions on a Roth (after-tax) basis only.
Exam Tip: Gotchas
- Employer matching contributions do NOT count against the employee's $24,500 elective deferral limit. They count only against the $72,000 total annual addition limit. An employee who defers $24,500 and receives a $10,000 employer match has used $34,500 of the $72,000 cap.
Who Can Use a 403(b) Plan?
Sometimes called tax-sheltered annuities (TSAs) or tax-deferred annuities (TDAs), these plans serve a specific group of employers:
- Available to employees of public schools, churches, and 501(c)(3) tax-exempt organizations
- Same deferral limits as 401(k): $24,500 (2026), with the same catch-up provisions
- May invest in mutual funds or annuity contracts
- Special 15-year catch-up: Employees with 15+ years of service may defer an additional $3,000/year (lifetime max $15,000)
Exam Tip: Gotchas
- The 403(b) 15-year catch-up is separate from the age-50 catch-up and the age 60-63 super catch-up. An eligible employee could potentially use both the 15-year service catch-up and the age-based catch-up in the same year.
- 403(b) plans are for public schools and 501(c)(3) organizations only; not all non-profits qualify. A 501(c)(6) trade association, for example, cannot offer a 403(b).
How Do Profit-Sharing Plans Work?
- Employer contributions are discretionary: no obligation to contribute every year
- Contributions may vary from year to year
- Must have a definite, predetermined formula for allocating contributions among participants
- Employer deduction limit: up to 25% of total covered payroll
Exam Tip: Gotchas
- A profit-sharing plan does not require the company to have profits to make contributions. The name is misleading. The employer has full discretion on whether and how much to contribute each year.
How Do Money Purchase Pension Plans Work?
- Employer contributes a fixed percentage of each employee's compensation every year
- Contributions are mandatory: the employer must contribute regardless of profitability
- Less flexible than profit-sharing plans because the contribution rate is locked in
- Because it is funded like a pension, a money purchase plan is subject to ERISA's qualified joint and survivor annuity (QJSA) distribution rule, the same requirement covered for defined benefit plans
What Should You Check on Exam Day?
- Locked in the 2026 401(k)/403(b) figures: $24,500 deferral, $8,000 age-50+ catch-up, $11,250 age-60-63 super catch-up, $72,000 total addition limit.
- Remembered employer matching counts against the $72,000 total addition limit, not the $24,500 elective deferral limit.
- Confirmed 403(b) eligibility is limited to public schools, churches, and 501(c)(3) organizations, and that its 15-year catch-up stacks with the age-based catch-ups.
- Distinguished profit-sharing (discretionary contribution) from money purchase pension (mandatory, fixed-percentage contribution).