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Profit-Sharing Plans
A profit-sharing plan is a tax-qualified plan that allows your employees to
share in the profits of your company. You can design the plan so that the
amount of your contribution will vary depending on your company's performance
each year. Of course, you don't have to make contributions every year. Again,
contributions are credited to the eligible employees' accounts.
Employer Benefits
- All contributions you make as an employer are deductible in the year you make them
- Profit-sharing plans, though subject to the tax law's nondiscrimination requirements,
are not subject to the funding requirements applied to other pension plans
- Profit-sharing plans may enhance your employees' commitment to your company
- The employee, rather than the employer, chooses how to allocate his or her profit-sharing contributions
Employer Benefits
- Employer contributions are not taxed to employees while they participate in the plan
- All earnings in employees' profit-sharing plan accounts grow tax deferred
- Employees pay taxes only when they begin receiving distributions from the plan.
By then, they may be in a lower tax bracket
Combined 401(k)/Profit-Sharing Plan
You can establish both a 401(k) and profit-sharing plan for employees. Or, if you
already have a 401(k) plan, adding a profit-sharing feature is fairly simple. A
combined plan must include all eligible employees, including those who do not
participate in the 401(k) plan. However, the amount an employer may deduct for
profit-sharing contributions is limited to 15% of the compensation paid to
participating employees during the year.
Employer Benefits
- The addition of a profit-sharing component to an existing 401(k) plan
also may allow for higher plan contributions than a 401(k) plan alone
- Participating in the profit-sharing plan may make employees more aware
retirement planning and may prompt them to contribute to their 401(k) plan
- It can assist the employer in meeting the pension law's testing requirements
by encouraging higher levels of participation in the plan
Employer Benefits
- Employees do not have to pay current income taxes on the amounts they defer
- Plan earnings grow tax-deferred
- Employees choose how they want to invest their plan account money
- Employer contributions are not taxed to employees while they participate in the plan
- All earnings in employees' profit-sharing plan accounts grow tax deferred
- Employees pay taxes only when they begin receiving distributions from the plan.
By then, they may be in a lower tax bracket
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