How do profit sharing plans work? How do they benefit my company and my employees?
Technically, a 401(k) plan is a type of profit sharing plan. The 401(k) is just an added feature. Profit Sharing and 401(k) Plans provided for employees are considered defined-contribution plans and are subject to federal laws and protections.
However, profit-sharing plans without the 401(k) feature differ in several ways, particularly with regard to who may contribute, how much may be invested and the tax benefits involved. In a typical profit-sharing plan, a company contributes all of the money on the behalf of employees. The employer can change the amount it contributes each year, and these plans are often tied to the profit of the company. What’s important to note is that employees cannot contribute or defer from their paycheck into a profit-sharing plan.
Benefits to the Company:
- There’s a tax deduction on the contribution
- Employees are incentivized to think in terms of the profit of the company
- Employee longevity is encouraged
- Contributions are made for both the business owners and the employees
Benefits to the Employees:
- They are able to save money that does not directly come out of their pockets
- They have an additional way to put away money for retirement
If you are considering creating a profit-sharing plan, we would recommend that you consult a trusted financial advisor. We want to help you set up the plan that is best for your company. Give us a call today.
Written by Tracy Wooley