profit sharing

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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 ?
There are several factors a company must consider with a profit-sharing plan.
In Section I of the paper, we provide an overview of some institutional features of ESOPs and profit-sharing plans.
This article describes the major features of today's profit-sharing plans, based on data on plan provisions from the BLS 1989 Employee Benefits Survey.
Paired plans may consist of an MPPP that provides a fixed contribution of 10% of compensation, along with a profit-sharing plan that allows the employer to contribute a discretionary amount ranging from 0%-15% of participants' compensation.
Provide a profit-sharing plan integrated with Social Security.
If a company leases workers on a substantially full-time basis for work historically performed by employees, the Service may take the position that the leased workers are company employees for retirement and profit-sharing plan purposes.
As a result, many employers were asking if there was a way to discriminate in favor of older employees in a profit-sharing plan.
In the past, simple profit-sharing plans could generate the maximum $30,000 annual allocation for employees earning more than $200,000.
Pension and profit-sharing plans may provide for the payment of "incidental" death benefits (Regs.
415(c) provides limits on the annual additions that can be made on behalf of any participant under a defined contribution plan, such as a profit-sharing plan or a Sec.
For example, assuming a calendar year discretionary profit-sharing plan adopted effective Jan.
Although the total contribution for each of those years was correct, book entry errors resulted in an incorrect allocation between the pension and profit-sharing plans.