Profit Sharing Plans in New York
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Profit Sharing Plans
David Wray, the president of the Profit Sharing/401(k) 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 to fund
their retirements.
All funds contributed to a profit-sharing plan accumulate
tax deferred, as 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 2008, a company is allowed to contribute up to 25% of an
employee’s salary or $46,000 (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.
As with other retirement plans,
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 allows you the freedom to
choose how much you wish to contribute each year.
This material was written and prepared by Emerald Publications. © 2007 Emerald Publications
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