profit sharing

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Related to Profit sharing plan: Deferred Profit Sharing Plan

Profit Sharing

A plan by which an employer distributes a set percentage of the company's profits to its employees. Employers may distribute the portion of its profits immediately (that is, employees may receive what amounts to a bonus) or it may set up a series of accounts for employees and defer the profit sharing until employees retire. The idea behind profit sharing is to give employees an incentive to work for the company's profitability. See also: DPSO, ESOP.

Profit sharing.

A profit-sharing plan is a type of defined contribution retirement plan that employers may establish for their workers.

The employer may add up to the annual limit to each employee's profit-sharing account in any year the company has a profit to share, though there is no obligation to make a contribution in any year.

The annual limit is stated as a dollar amount and as a percentage of salary, and the one which applies to each employee is the lower of the two alternatives.

Employers get a tax deduction for their contribution. Employees owe no income tax on the contributions or on any of the earnings in their accounts until they withdraw money.

In some cases, employees in the plan may be able to borrow from their accounts to pay for expenses such as buying a home or paying for college.

Profit-sharing plans offer employers certain flexibility. For example, in a year without profits, they don't have to contribute at all. And they can vary the amount of each year's contribution to reflect the company's profitability for that year.

However, each employee in the plan must be treated equally. This means that if an employer contributes 10% of one employee's salary to the plan, the employer must also contribute 10% of the salaries of all other employees in the plan.

profit sharing

the distribution of some portion of PROFITS to the employees of a company. It can take the form of an annual cash bonus based on the previous year's profits or it can form an element of weekly or monthly pay (see PROFIT-RELATED PAY). Less direct forms of profit sharing include allocation to employees of shares in the company, paid for out of company profits, and providing employees with the option to buy shares at some point in the future at current prices, thereby enabling them to benefit from both the share dividend and any growth in share value resulting from increases in profitability (see EMPLOYEE SHARE OWNERSHIP PLAN). Profit sharing is often advocated to improve employee commitment and thereby improve PRODUCTIVITY. See FINANCIAL PARTICIPATION.

profit sharing

the distribution of some portion of PROFITS to the employees of a company. It can take the form of an annual cash bonus based on the previous year's profits, or it can form an element of weekly or monthly pay (see PROFIT-RELATED PAY). Less direct forms of profit sharing include allocation to employees of shares in the company, paid for out of company profits, and providing employees with the option to buy shares at some point in the future at current prices, thereby enabling them to benefit from both the share dividend and any growth in share value resulting from increases in profitability (see EMPLOYEE SHARE OWNERSHIP PLAN). Profit sharing is often advocated to improve employee commitment and thereby improve PRODUCTIVITY. See PRINCIPAL-AGENT THEORY.
References in periodicals archive ?
Example: For the year 2009, a profit sharing plan has two participants with compensation as shown below.
Vesting is sometimes more generous in a profit sharing plan since it is designed as an employee incentive.
Benefits from a profit sharing plan are usually payable at termination of employment or at the plan's stated normal retirement age.
Like a profit sharing plan, when a money purchase plan is adopted, an account is established for each participant to record the contributions made for him.
As with a profit sharing plan (see above), a money purchase plan may permit or require employee contributions.
A money purchase plan contains a vesting schedule, subject to the same considerations and rules as the vesting schedule in a profit sharing plan (see above).
This can have the effect of a much larger cash outlay that keeps increasing due to the creeping gift tax bracket Over the years, we have been involved with an exciting estate planning technique that allows for the acquisition of large amounts of survivorship life insurance in profit sharing plans to assist in solving significant estate tax problems.
The age-weighted profit sharing plan will produce a larger contributions for the older employee and do a better job of providing an adequate pension benefit than the standard profit sharing plan.
This degree of flexibility does not, of course, approach the complete contribution discretion possible under a profit sharing plan, but frequently is satisfactory to the employer.
The administrative cost will usually be higher than for a profit sharing plan, unless the profit sharing plan is encumbered by additional administrative details such as permitting the participant to select investments from several funds, making loans, and frequent distribution of statements to participants.
As an alternative to borrowing, the insured could make contributions to the irrevocable trust, while the policy is in the profit sharing plan, sufficient to cover the anticipated income tax or provide individual life insurance with third-party ownership.
Under federal tax law, amounts payable as a death benefit from a profit sharing plan are considered assets of the participant's estate and are subject to tax when the participant dies.