Profit Sharing Plans for Small Businesses

Profit Sharing Plans for Small Businesses. To order copies call 1-866-444-3272.

Why Profit Sharing Plans?

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 many reasons:

  • A well-designed profit sharing plan can help attract and keep talented employees.
  • Contributions to a profit sharing plan are discretionary. The employer can choose when and how much to contribute.
  • This type of plan gives employers flexibility designing the key features.
  • A profit sharing plan benefits a mix of rank-and-file employees and owners/managers.
  • The money contributed may grow through investments in stocks, bonds, mutual funds, money market funds, savings accounts, and other investment vehicles.
  • Contributions and earnings generally are not taxed by the Federal Government or by State governments until they are distributed.
  • A profit sharing plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.

This booklet highlights some of a profit sharing plan's advantages and some of your options and responsibilities as an employer operating a profit sharing plan. For more information, a list of resources for you and for prospective plan participants is included at the end of this booklet.

Establishing a Profit Sharing Plan

When you establish a profit sharing plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institution - such as a bank, mutual fund provider, or insurance company - to help with establishing and maintaining the plan. In addition, there are four initial steps for setting up a profit sharing plan:

  • Adopt a written plan document,
  • Arrange a trust fund for the plan's assets,
  • Develop a recordkeeping system, and
  • Provide plan information to employees eligible to participate.

Adopt a written plan document - Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide the document. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you will be bound by the terms of the plan document.

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 to determine 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.


2006-03-21 13:50:49 by AnonForGoodReason

Who here knows about Profit-Sharing Plans?

For small businesses in California? I'm asking because I've been working for the same company for almost ten years and have since accrued a significant sum of vested dollars in a small Profit-Sharing Plan.
I need to figure out what happens when I leave the company. Does the Plan Admin usually just write you a check (which you are then taxed on at tax time)? Or do you have other options to prevent losing too much money to taxes, such as roll it over into some kind of Roth?
My biggest concern is what I will lose in taxes from this vested amount when I leave the company.

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