The plan established by Abacus Ltd. is a B. Defined contribution plan. In this type of plan, the company contributes a fixed percentage of the employee's pay into an account, and any potential additional contributions the company might have to make due to investment losses are defined and limited to specific circumstances (investment losses greater than 25% of initial investments). In a defined contribution plan, the obligation to make further contributions in case of significant investment losses is typically not a feature, which is a characteristic of a defined benefit plan. However, since the eventual benefit to the employee is not clearly defined and guaranteed, but rather depends on the performance of the investments, this is still classified as a defined contribution plan.
Understanding Employee Retirement Plans: Defined Contribution Schemes and Their Responsibilities
Abacus Ltd. has created a new plan for its employees. Abacus Ltd. contributes 2% of an employee's pay into an account and these contributions are invested on the employee's behalf. In accordance with the plan, Abacus Ltd. has an obligation to make further contributions in the case of any investment losses greater than 25% of initial investments.
What type of plan is this?
A. Defined benefit plan
B. Defined contribution plan
C. Multi-employer plan
D. State plan
