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.
As with the money purchase
pension plan, 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 the amount
allocated to a participant's
account is limited to $40,000
per year.
At retirement, the employee
will receive the then value of
his account.
Profit sharing plans and
money purchase pension plans are
collectively called "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
(contributions may not exceed
25% of payroll, and the amount
allocated to a participant's
account is limited to $40,000
per year).
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. As with the money
purchase pension plan, 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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