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Profit sharing plan

What is Profit sharing plan? Profit sharing plan is a qualified retirement plan established and maintained by an employer which enables emp...

What is Profit sharing plan?

Profit sharing plan is a qualified retirement plan established and maintained by an employer which enables employees and their beneficiaries to participate in the profits of the employer's business.

Profit Sharing Plans

In a profit sharing plan, an employer will make contributions to funds of the company depending on his/her profit generated during the year. If he/she makes no profit, no contribution is required. However, if he/she makes a profit, he/she shall be required to make a contribution of certain percentage, though the maximum limits of such a percentage may not be clearly defined. Normally, there is a lower limit that forces employer to contribute even if he/she is not profitable during the year.

Normally, an upper limit of contribution to profit sharing plan is set at 25%. And this amount of deduction will be shared among eligible employees. Then, at the year end, a certain percentage of profit sharing fund or a certain amount of money shall be deducted to share among employees. For example, in 2010, employees shall be shared an amount of $49,000 or 100% of profit sharing plan fund, whichever is less. Therefore, they may even receive a large contribution of 25% of their contribution if the employer’s contribution is not exceeding 25% limit.

There are 3 types of profit sharing plans: traditional, age-weighted, and newly comparable. Each has its own contribution formula which defines the percentage of contribution.

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