There are different types of contribution plans created for employees. This article gives you some information about profit sharing plan which benefits the workforce of companies or organizations.
Employee benefits plan is one of the things that both existing and potential workforce look upon when working at a company or organization. It is somehow a sort of investment on their part, as well as a safety net when they reach the end of their employment.
What is profit sharing plan?
A profit sharing plan is a defined contribution plan which allows the companies to help their workforce to save for their retirement. Profit sharing contributions from the employer are discretionary and the company can decide from year to year what amount they will contribute to an employee’s plan. The company or organization also have the choice to whether contribute at all, especially if the company does not have a profit for the month or within a particular timeframe. When there is no profit obtained, it does not have to make contributions to the employees’ plan.
A company does not need to be lucrative just to have a profit-sharing plan. This type of contributions plan for the workforce is flexible. It is a great option for a retirement plan that can be affordable for small businesses or even other businesses of any size. It also aligns the financial well-being of the employees to the success of the company.
There is no set or a particular amount that must be contributed to a profit sharing plan every year. Companies can set a maximum amount that can be contributed to the plan for each of their employees. The amount depends on the fluctuation of inflation over time. The maximum contribution amount for a profit sharing plan is lesser than the compensation. When determining the employer and employee contributions, the amount of the employee’s salary that can be taken into consideration is limited.
How it works
Unlike other types of contribution plan participants, the employees with profit sharing plans do not create their own contributions. The company they work for can have other types of retirement plans along with a profit sharing plan. It is like an add-on plan for the company. The companies who avail this plan review and do the calculations, planning, and paperwork.
The employees can get their profit shares in the form of company stock or cash. A qualified tax-deferred retirement account receives the contributions. The account allows penalty-free distributions to be taken after the age of 59 1/2.
There are also plans that offer a combination of cash together with deferred benefits. The cash is distributed and taxed directly at ordinary income rates which works like a retirement contribution with an annual bonus.
An employee can use the profit sharing plan as a form of a loan which they can use for personal or emergency purposes. If an employee leaves the company, he or she can move the assets form of the plan into a Rollover IRA. All the distributions taken before age 59 1/2 is subjected to a 10% penalty.
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