Profit sharing plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.
Employers start a profit sharing plan for a host of reasons:
1. A well-designed profit sharing plan can help attract and keep talented employees.
2. Contributions to a profit sharing plan are discretionary. The employer can choose when and how much to contribute.
3. This type of plan gives employers flexibility in design of key features.
4. A profit sharing plan benefits a mix of rank-and-file employees and owner/managers.
5. The money contributed may grow through investments in stocks, mutual funds and other investment vehicles.
6. Contributions and earnings generally are not taxed by the Federal government or by State governments until they are distributed.
7. A profit sharing plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.
A profit sharing plan allows you to decide (within limits) from year to year whether to contribute on behalf of participants. If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money is accounted for separately for each employee. Your contributions to the plan can be subject to a vesting schedule (which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time). Annual testing ensures that benefits for rank-and-file employees are proportional to benefits for owners/managers.
Once you have decided on a profit sharing plan for your company, you will have flexibility in choosing some of the plan’s features – such as when and which employees can participate in the plan. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.
Carroll Consultants, Ltd. draws from its experience in profit sharing plans to ensure their clients are fully informed when structuring or restructuring a retirement package.