This chapter covers the basics of profit sharing plans. Specific types of plans are discussed in other chapters, so the focus here is on describing profit sharing plans in general. The chapter begins by defining profit sharing plans and describing when they might be used. | A profit sharing plan is a defined contribution plan featuring a flexible employer contribution provision Contribution can be a purely discretionary amount or based on some type of formula Employer contributions allocated to individual accounts of participants on nondiscriminatory basis Plan benefits consist of the amount accumulated in each participant’s account at retirement or termination Plan benefits usually distributed in a lump sum at termination What is it? Copyright 2009, The National Underwriter Company When employer’s profits varies from year to year When employer wants an incentive feature When employee group is Relatively young Willing to accept a degree of investment risk When employer wants to supplement an existing defined benefit plan When is its use indicated? Copyright 2009, The National Underwriter Company Maximum contribution flexibility for employer Contributions can be made even if no profits Provides a tax-deferred retirement savings medium for employees Participants can benefit from good investment results Advantages Copyright 2009, The National Underwriter Company Retirement benefits may be inadequate for employees entering the plan at later ages Relative amount of plan funding available for highly compensated employees is more limited Employees bear investment risk under the plan Level of employer funding less predictable Disadvantages Copyright 2009, The National Underwriter Company Discretionary contribution provision Employer can determine amount each year Employer can omit contribution in a given year But, IRS regulations require contributions to be “substantial and recurring” Formula provision Specified amount contributed each year “Profits” may be defined as specified by employer Possibly can include a “fail-safe” provision Design Features Copyright 2009, The National Underwriter Company All plans must have formula for allocating employer contributions to participant accounts Cannot discriminate in favor of . | A profit sharing plan is a defined contribution plan featuring a flexible employer contribution provision Contribution can be a purely discretionary amount or based on some type of formula Employer contributions allocated to individual accounts of participants on nondiscriminatory basis Plan benefits consist of the amount accumulated in each participant’s account at retirement or termination Plan benefits usually distributed in a lump sum at termination What is it? Copyright 2009, The National Underwriter Company When employer’s profits varies from year to year When employer wants an incentive feature When employee group is Relatively young Willing to accept a degree of investment risk When employer wants to supplement an existing defined benefit plan When is its use indicated? Copyright 2009, The National Underwriter Company Maximum contribution flexibility for employer Contributions can be made even if no profits Provides a tax-deferred retirement savings medium for .
