Profit-Sharing Plans

Profit-Sharing Plans

David Wray, the president of the Plan Sponsor Council of America, once said that the purpose of profit-sharing plans is “to generate goodwill and a feeling of partnership” between employer and employee. Profit-sharing plans give employees a share in the profits of a company each year and can help fund their retirements.

All the money contributed to a profit-sharing plan accumulates tax deferred, as it does with other defined-contribution retirement plans, but employer contributions are tax deductible only if the plan is defined as an elective deferral plan, which means that instead of accepting their profit shares as cash, employees defer the assets into retirement funds.

Profit sharing is attractive to business owners because of its flexibility. Employers can choose how much to allot to employees each year based on the amount of revenue taken in. There is no required minimum. If the company has a bad year, the employer has the option of giving very little or nothing at all to employee accounts.

Employees are usually enrolled automatically in profit sharing once they become eligible. Companies can choose eligibility requirements based on age and length of service. In 2014, a company is allowed to contribute up to 25% of an employee’s salary or $52,000 (whichever is less). This amount is indexed annually for inflation.

Typically, companies set up vesting schedules that dictate how long workers must be employed in order to claim profit-sharing contributions when they move to another job or retire. Once employees are fully vested, they can take the entire amount contributed on their behalf and roll it over to an IRA or to a new employer’s qualified retirement plan.

If you participate in a profit-sharing plan, you may begin withdrawing funds after age 59½ without incurring a 10% income tax penalty. Withdrawals are taxed as ordinary income. Some plans may allow early withdrawals. Profit-sharing providers have greater flexibility when it comes to deciding the terms of early withdrawal than do administrators of other plans, such as 401(k)s. However, the trend has been to permit no early withdrawals.

Generally, you must begin taking required minimum distributions after reaching age 70½. You can elect to withdraw the assets as a lump sum and be taxed on the entire value of the fund or you can set up a minimum distribution schedule based on your life expectancy.

Some companies offer a combination arrangement with both a profit-sharing plan and a 401(k). A conjoined plan allows employers to contribute as much or as little as they would like each year, while giving employees a way to supplement their retirement funds.

If you are a business owner, profit sharing may be a way to attract high-caliber employees. It provides retirement funds for your employees yet still gives you the freedom to choose how much you wish to contribute each year.

 

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC

Kehoe Financial Advisors, LLC
125 Boggs Lane Cincinnati, OH 45246
Map and Directions
Phone: 513-481-8555 Fax: 513-481-8561

Better Business Online Trustmark
Kehoe Financial Advisors
and NFP Securities, Inc.
are neither endorsed by
nor affiliated with the
Better Business Bureau.

 

Securities and Investment Advisory Services offered through NFP Securities, Inc. a Broker/Dealer, Member FINRA/SIPC  and a Federally Registered Investment Advisor. Kehoe Financial Advisors is a member of Partners Financial, a division of NFP Insurance Services, Inc., which is a subsidiary of National Financial Partners Corp (NFP), the parent company of NFP Securities, Inc.  This site is published for residents of the United States only. Registered representatives and investment advisor representatives of NFP Securities, Inc. may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact the NFP Securities, Inc. Compliance Department at 512-697-6000