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Profit Sharing Plan

Key Features

  • Employer shares profit with employee
  • Contributions are elective

A profit sharing plan is a plan under which an employer offers to share profits with employees by contributing a portion of them to a qualified retirement plan. The amount contributed to the plan may be determined by formula or by a Board of Directors (or similar entity) each year.

Funds contributed on behalf of an employee are allocated to his or her account and invested. The amounts accumulate tax-free until retirement, thereby affording the greatest benefit to younger employees. Contributions to a profit sharing plan may not exceed 25% of the payroll, and there is an annual limit on the annual amount that can be allocated to a participant's account. At retirement, the employee will receive the then value of his account.

Profit sharing plans are "defined contribution" plans, because the contribution is stipulated under the terms of the plan, and the retirement benefit is not determinable until the retirement of the participant.

Age-Based and Cross-Tested Profit Sharing Plans

Key Features

  • Employer shares profit with employee
  • Favors older and highly compensated employees

A profit sharing plan may be weighted by age and compensation, so that the older employees obtain a larger share of the contributions allocated. Such plans are subject to the usual profit sharing limitations. Such an allocation may result in a allocation formula which better suits the needs of a company which desires to have the best of both worlds, totally flexible contributions coupled with favoring of older employees.

The amount contributed to the plan may be determined by formula or by a Board of Directors (or similar entity) each year. Funds contributed on behalf of an employee are allocated to his or her account and invested. The amounts accumulate tax-free until retirement, thereby affording the greatest benefit to younger employees. At retirement, the employee will receive the then value of his account.

 
 
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