Tags: Retirement | profit-sharing plans | retirement

What Are Profit-Sharing Plans

By    |   Wednesday, 12 August 2015 01:51 PM

Profit-sharing plans are retirement plans for company employees, but contributions are made by the employer. The employer decides how much the company pays into the plan, though the contributions are often based on the employee’s salary level.

Like IRAs and other federally qualified retirement plans, the contributions and investment earnings in profit-sharing plans are allowed to grow on a tax-deferred basis, according to AXA Equitable Financial Services. The money is taxed when distributions to the employee begin. Terms of the plans vary and are based on how the employer sets them up.

Plans could include withdrawals from the retirement account after age 59 1/2 or after the employee has worked in the company for a certain amount of years. Financial hardship withdrawals may be included in some plans. Loans are offered in some plans with companies allowing workers to borrow as much as 50 percent of the account balance, depending on the plan.

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A 10-percent tax penalty applies if withdrawals are taken before age 59 1/2 as with other qualified plans, according to the IRS. AXA noted penalties may not occur if employment is terminated or a person leaves the job after reaching age 55. When separating from a company after a certain number of years, employees may also roll over amounts into an IRA or other qualified retirement plan without penalty.

Employers are allowed discretion in contributions to profit-sharing plans. There are no set amounts and employers can contribute a certain amount one year without making contributions in other years, the IRS reported. Businesses of any size can set up profit-sharing plans and can have other retirement plans at the same time.

Employers have flexibility with profit-sharing plans. No contributions are required during years of little or no profit, but employers are allowed to make contributions even if the company makes no profit, according to Raymond James.

Several types of plans are available to employers for contributions. A salary ratio method offers a certain percentage for all employees in each of their accounts. Another plan bases contributions on an employee’s age or time of employment. A comparability plan gives the employer the option of providing more benefits to employees who have made certain accomplishments within the company.

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Profit-sharing plans are retirement plans for company employees, but contributions are made by the employer. The employer decides how much the company pays into the plan, though the contributions are often based on the employee's salary level.
profit-sharing plans, retirement
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2015-51-12
Wednesday, 12 August 2015 01:51 PM
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