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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

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.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

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.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
In profit sharing plans, forfeitures are usually added to remaining participants' account balances.
Some profit sharing plans which use formula contributions do not allocate forfeitures to the remaining participants, but instead offset the current contribution by amounts forfeited.
Buzzetta Construction [92 TC 641 (1989)] and Martin Fireproofing Profit Sharing Plan and Trust [92 TC 1173 (1989)] are the first in a rather lengthy line of cases where the IRS has questioned plan compliance after formally approving a plan.
Then too, profit sharing plan distributions can be linked to employer-matched contributions to the 401 (k).
Deferred profit sharing plans may or may not be especially risky, depending on the portfolio policies followed.
A new comparability profit sharing plan might call for over $25,000 going to each owner's account one year while the other three employees receive company contributions under $2,000 apiece.
An age-weighted profit sharing plan is a profit sharing plan in which the allocation formula contains an actuarial age-weighting factor (i.e., providing a higher allocation for older plan entrants).
An important estate planning technique that allows the grantors to maintain total flexibility, thereby allowing them to change the potential beneficiaries and the dispositive provisions of the ILIT is the acquisition of survivorship life insurance in a profit sharing plan.
Supreme Court are binding throughout the country, it is now absolutely certain that benefits held in a qualified pension or profit sharing plan are not subject to creditors.
Frequently they qualify as profit sharing plans by providing for employer contributions out of current or accumulated profits.
He also has managed the employee benefits programs of a major American chemical and textile manufacturer involving $300 million-assets of pension and profit sharing plans. He also has served as investment advisor and as the research director of a group that managed $1 billion in assets.
A significant number of individuals have accumulated substantial amounts in their qualified pension or profit sharing plans. These assets are subject to both estate and income taxes, and, in some cases, excise tax.