What is a limit on contributions to a defined contribution plan (DCP)?

What is a limit on contributions to a defined contribution plan (DCP)?

• A. It can exceed 25% of employees’ income
• B. It cannot exceed 18% of employees' current contribution level
• C. It depends solely on the company's profits
• D. There is no limit on contributions

Answer: (B)

In a defined contribution plan (DCP), the limit on contributions is established to ensure that retirement accounts remain within the framework of regulations governing tax-deferred savings. Specifically, contributions to a DCP cannot exceed 18% of the employee's current income level, as this regulation aims to maintain fairness and prevent excessive tax advantages while allowing employees to save adequately for retirement. This percentage is applicable to the employee’s earned income, with certain limits set on pension contribution amounts for tax purposes. Other options reflect misconceptions regarding DCP contribution limits. For instance, exceeding 25% of employees' income is not permissible, as it violates the established thresholds set out by the tax authorities. Additionally, claiming that contribution limits depend solely on the company’s profits fails to recognize that DCP contributions are tied more directly to employee income rather than business performance. Lastly, stating that there is no limit on contributions is incorrect, as regulatory frameworks clearly define maximum contribution limits to promote responsible savings behavior and ensure equitable access to retirement benefits for all employees.

In a defined contribution plan (DCP), the limit on contributions is established to ensure that retirement accounts remain within the framework of regulations governing tax-deferred savings. Specifically, contributions to a DCP cannot exceed 18% of the employee's current income level, as this regulation aims to maintain fairness and prevent excessive tax advantages while allowing employees to save adequately for retirement. This percentage is applicable to the employee’s earned income, with certain limits set on pension contribution amounts for tax purposes.

Other options reflect misconceptions regarding DCP contribution limits. For instance, exceeding 25% of employees' income is not permissible, as it violates the established thresholds set out by the tax authorities. Additionally, claiming that contribution limits depend solely on the company’s profits fails to recognize that DCP contributions are tied more directly to employee income rather than business performance. Lastly, stating that there is no limit on contributions is incorrect, as regulatory frameworks clearly define maximum contribution limits to promote responsible savings behavior and ensure equitable access to retirement benefits for all employees.