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February 16, 2009

Profit sharing plan

Your Guide

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Definition

An employer-sponsored  qualified-retirement-plan, established by an employer for the benefit of its employees and their beneficiaries.

Profit sharing plans are defined contribution plans,  funded with employer contributions, but can include a 401(k) feature

Contributions to profit sharing plans are usually discretionary, i.e. the employer can chose each year whether it wants to fund the plan. However, some plans are designed to allow the employer to choose whether it wants to adopt a mandatory-contribution feature in the plan

Earnings in a profit sharing plan accrue on a tax-deferred basis . Contributions and earnings are taxable to the participant when withdrawn from the participant’s profit-sharing account

Referring Cite

IRC § 401(a)

Additional Helpful Information

  • Employer contributions to profit sharing plans are subject to the deductibility limit of IRC § 404, i.e. 25% of eligible compensation
  • Contrary to it’s name , contributions to a profit sharing plan need not be based on profits
  • Though contributions are discretionary, they must be ‘substantial and recurring
  • Employer contributions to profit sharing plans can be subject to a vesting schedule
  • Participants must experience a triggering event in order to be eligible to make withdrawals from their profit sharing accounts

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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