Plan Participant: What It Is, How It Works

What Is a Plan Participant?

A plan participant is someone who either contributes to a pension plan or qualified account (such as a 401(k) or health savings account (HSA)) and is in a position to receive benefit payments from the plan. A plan participant can mean either a working or retired person receiving distributions from a plan, a beneficiary, or a dependent named by a contributing member.

Understanding Plan Participants

A plan participant has the right to receive benefit payments from a retirement plan, whether it is a defined benefit pension or a defined contribution plan, as long as the requirements under the plan's contract have been fulfilled. Under most defined benefit pension plans, the member is required to complete a minimum number of years of service in order to qualify for their maximum allowable pension (known as vesting).

The tax law definition of an "active participant" to a company plan could include employees not participating in the employer's plan. A beneficiary of a deceased participant would also be considered a plan participant.

A plan participant is also sometimes used to describe those who are enrolled in a company's 401(k) plan, which can include an employee, former employee, or retiree. A 401(k) would consist of salary deferrals or contributions from the employee with the possibility of the employer depositing matching contributions based on a percentage of the employee's salary.

However, sometimes plan participants can include those employees who are not currently contributing to the plan but are enrolled in the 401(k). Plan participants can also be those who are not enrolled but are eligible to be enrolled. In other words, a plan participant isn't always an employee nor someone who is actively contributing to the retirement plan.

Pension Plans for Participants

A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement.

In addition to an employer's required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of their current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker’s annual contributions, up to a specific percentage or dollar amount. Typically, a pension plan often refers to the more traditional defined benefit plan, with a set payout, funded and controlled entirely by the employer. Some companies offer both types of plans. They even allow employees to roll over 401(k) balances into their defined benefit plans. 

Another variation is the pay-as-you-go pension plan. Set up by the employer, these tend to be wholly funded by the employee, who can opt for salary deductions or lump sum contributions, which are generally not permitted in 401(k) plans. Otherwise, they are similar to 401(k) plans, except that they usually offer no company matching contribution.

Pension Funds

When a defined-benefit plan is made up of pooled contributions from employers, unions, or other organizations, it is commonly referred to as a pension fund. Run by a financial intermediary and managed by professional fund managers on behalf of a company and its employees, pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations. Their actions can dominate the stock markets in which they are invested. Pension funds are typically exempt from capital gains tax. Earnings on their investment portfolios are tax-deferred or tax-exempt.

The Bottom Line

Whether it is a pension, 401(k), or IRA, understanding who is eligible to receive benefits from the retirement plan is essential to establishing financial security for you and your loved ones.