A profit-sharing agreement for
pensions
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
, typically in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, is an agreement that establishes a pension plan maintained by the employer to share a portion of its
profits with its employees.
History
A profit-sharing agreement used to be supplemental to a type of pension called a
defined contribution plan
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these a ...
. For example, if an employee should become ill or incur economic hardship, then access to some or all of profit sharing account would prevent the employee from quitting.
Today, most newer companies only have profit-sharing plans and don't have a defined benefits plan. The simplest and most common profit sharing implementation is for the employer to contribute a flat dollar amount that is allocated based on a percentage of the employees' annual compensation. Total annual contributions limits are based on how much the employee defers, plus how much the employer contributes. Currently, the total amount contributed to the plan cannot exceed the lesser of:
* 100 percent of the participant's compensation; or
* $53,000 for 2016 (for those 50 or over, an additional $6,000 is allowed as a catch-up contribution)
Requirements
The
Treasury regulation
Treasury Regulations are the tax regulations issued by the United States Internal Revenue Service (IRS), a bureau of the United States Department of the Treasury. These regulations are the Treasury Department's official interpretations of the Inter ...
s to the
Internal Revenue Code
The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 ...
sets out the requirements for a profit-sharing agreement. The agreement must use a predetermined formula for allocating and distributing the profits. Then the agreement must set out whether allocations may begin after a fixed number of years, attainment of certain age or prior occurrence of some event.
The agreement must be tied to the basic compensation of the employee by allocating a profit sharing amount to the employee's account based on the proportion of the employee's salary to the total salary of the participants.
An employer does not need to earn profits to have a profit-sharing agreement. Contributions under the agreement need not be based on profits but rather salary and a phantom profit amount.
[26 USCA 401(a)(27)] This phantom profit originates from a predetermined formula for allocations under the profit-sharing agreement.
See also
*
Profit sharing
Profit sharing is various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies thes ...
*
Retirement plans in the United States
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire t ...
References
External links
Choosing a Retirement Plan: Profit-Sharing Planfrom the IRS
Profit Sharing Plans for Small Businessesfrom the Employee Benefits Security Administration (EBSA) agency within the U.S. Department of Labor (DoL)
Pensions
Profit
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