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February 16, 2009

Profit sharing plan

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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 Contributions and earnings are taxable to the participant when withdrawn from the participant’s profit-sharing account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
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