Non-Contributory vs. Contributory Retirement Plans: Understanding the Difference

If you are planning your financial future, you need to understand the different types of retirement plans. A non-contributory retirement plan is typically funded by the employer only. With a contributory retirement plan, the employee pays a portion of her regular base salary into the pension plan.

Pension Plans

With a non-contributory or defined benefit plan, the employer promises to pay in the future an amount that is based on pay rate and the number of years with the company. The final pension payout is based on the age, health and number of years before the employee retires.

In a contributory pension plan, the employer and the employee both pay into the program. Contribution percentages are set by the terms outlined within the pension plan.

Benefits

One of the benefits of a non-contributory plan is that a specified amount is guaranteed to the retiree, generally when he reaches age 65. The plan's benefits can be accumulated over a short period.

With contributory plans, employers can contribute a percentage or match the dollar amounts the employee has invested into the plan. Contributions into such a plan can be made through payroll pretax deductions, enabling the employee to reduce taxable earnings on income.

Considerations

Non-contributory plans are costly and complex. For contributory plans, the total amount that the employee can contribute to the pension fund is defined on an annual basis by the Internal Revenue Code, and benefits can increase or decrease, depending on contributions made and volatility of the investment market.