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 ?
Other firms consider net worth and dividends to be paid before contributions to the profit-sharing plan can be made.
Profit-sharing plans have been in existence since the early 19th century.
In the Employee Benefits Survey, profit-sharing plans are defined as arrangements in which companies make contributions, based on profits, to individual employee accounts.
Typically, clients set up a defined contribution profit-sharing plan, or amend an existing profit-sharing plan, with language that allows for:
The allocation of the contribution to a participant's account in a profit-sharing plan is a two-step process.
Overall, this represents a lower percentage of pay (also capped at $210,000 for 2005) than just a straight profit-sharing plan.
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.
A profit-sharing plan is unique not only because the co-owners share an insurable interest in each other's life but also because of the nature of a profit-sharing plan's segregated account structure.
Section 404(a)(3)(A)(i) allows employee/employer contributions to a profit-sharing plan of up to 15% of the employees wages capped by a total contribution limit of $30,000.
Legislation considered in 1994 would have eliminated age-weighted profit-sharing plans, but the proposal was ultimately deleted.
Clients include endowments, foundations, pension and profit-sharing plans, registered investment funds and other financial intermediaries.
The IRS position was upheld in court, with the consequence that the service recipient's pension and profit-sharing plans were held not to meet the exclusive benefit rule of Sec.