A profit-sharing plan is a "defined contribution plan," which means the amount to be contributed to the plan is limited, but the amount paid to the employee at retirement is not. The amount of the actual benefit will depend on plan contributions and on the return earned by the investments in the plan. Contrary to what the name may imply, contributions to a profit-sharing plan are not based on the profitability of the company, but on the amount of each participant's compensation and how much the employer chooses to contribute to the plan.
To allow employees to save money for retirement. Contributions to profit-sharing plans are tax-deductible for the employer and the plans help attract and retain quality employees. All contributions are made by the employer, are tax deductible and can vary from year to year. The employer can contribute up to 25 percent of aggregate annual compensation* of all the participants. An individual participant can receive a benefit of up to 100 percent of compensation or $49,000 (2009), whichever is less.
* The maximum compensation that may be used is $245,000 (2009). To be eligible for a contribution, an employee must be 21 years old and have worked for the company the past two years. A year of service is equivalent to 1,000 hours. If a vesting schedule is used, only one year of service may be required. An employer can elect a more liberal eligibility requirement.
The employees of Warren Wealth Management do not provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.