Profit Sharing Plans Explained

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Most common forms of retirement plans provided by employers are set up in such a way that the employee who owns the plan provides most of the money which goes into the account. Some employers match a considerable amount of the contrition, even doubling it in some cases, but a profit sharing plan differs from just about any other in that the employer is responsible to make the full contribution. In other words, the employee does not put any money into the account.

A similar plan is a money purchase plan, where employers set a fixed percentage of workers' compensation which they will pay, and that amount must be met each year regardless of how much money a company makes. In contrast, the amount of compensation is set each year by the employer. Because the contribution amount is based on company profits, it is easier on the company during tougher years where performance decreases. If the need arises, years can even be skipped, where no contribution is made. The maximum contribution in 2008 is the lesser of 25% of eligible worker compensation or $46,000 annually.

Although this type of plan seems to benefit the employee more than the employer, the company providing such a plan has certain advantages as well. The contributions made to an employee's account are tax deductible, and plan earnings are tax-deferred until withdrawal. While this is definitely of value to a company, giving employees a profit sharing plan gives them a sense of ownership in the company. The fact that the contributions are based on company profits has the possible effect of increasing productivity in workers who see the connection between their amount and quality of work and the profits of the company. Of course, this would tend to be more characteristic of smaller companies. Regardless of company size, adding such a plan is another attractive bonus to potential high quality employees. And employees already in the company might be more motivated to continue working if they get the option of a profit sharing plan. These are obviously things that just about any employer would want, and having a team of high quality employees is essential to successful business. An added detail is that part-time and inexperienced workers can be excluded from a profit sharing plan. This rewards those employees who have experience on the job and work full-time, providing maximum benefit to the company.

Of course, the employee who participates in a profit sharing plan gets the biggest benefit. Not having to contribute anything means an employee's account grows for retirement without any involvement. This might not be favorable for those who would prefer for their money to grow at a faster rate by contributing additional funds into the account, but many employees who find it difficult to come up with money to place in a retirement account might be happy with this plan. It helps them save for retirement and is far better than having nothing at all when it comes to retirement money.

Ephren W. Taylor II first revealed his extraordinary knack for making money at age 12 and he hasn't slowed down since. He was a self-made millionaire while still in his teens. In his twenties he became the youngest African-American CEO of any publicly traded company ever, City Capital Corporation (CTCC). Today Taylor and City Capital oversee tens of millions in assets for clients ranging from entertainment icons and pro athletes to church members and private companies. He is a dynamic speaker and author of the best seller "Creating Success from the Inside Out." Learn more at CashFreeInvesting.com, IRACashFlow.com or Ephren.com.

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