Profit Sharing Retirement Plan

How do a profit sharing retirement plan works? How do I make use of it? If these questions are bugging you then you are just in the right place. These questions will be answered in this article.

This will provide you needed information about some of the things you need to know about the profit sharing retirement plan.

Do you really need profits to make contributions to a profit sharing plan?

This might come as a surprise but the answer is NO! You do not need profits in order to make contributions to a profit-sharing plan. Of course, having a profit would probably make it easier to contribute something. But it is not a requisite in the employment of a profit sharing plan. You can make your contributions to a profit sharing plan at your own discretion. There will be no amount that will be set for you to reach. Contributions will depend upon your capability to contribute. If you can contribute something then go for it. But if you cannot, then no person will urge you to provide for something you cannot.

What will happen if you cannot make a contribution to the profit sharing retirement plan?

If you are unable to make contributions, it will be a necessity to have a set formula for determining how the contributions are divided. This will establish the money that will go into separate accounts for each employee. Profit sharing contributions are allocated to employees based on compensation. An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees.

What are the advantages and disadvantages of the profit sharing plan?

There are many advantages in employing the profit sharing plan. One such advantage is greater flexibility in contributions. As mentioned earlier, contributions are discretionary. You will not be made to contribute any amount if you are unable to. Contributions will depend solely upon the will and discretion of the employee. Never the less, there are also some disadvantages in this profit sharing plan. Administrative costs may be higher than under more basic arrangements. There is also a need to test the benefits to determine if they do not discriminate the employees that are highly compensated.

Do all employees have to be included in a plan?

Certain employees may be excluded, but strict coverage rules are enforced to prevent the plan from discriminating in favor of highly compensated employees. This is for the reason that the profit sharing plan should be fair in its dealings with the every employee and be just in not putting into its good side the highly paid employee.

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