What can you do to keep your workforce satisfied? Experts admit that keeping personnel content can be difficult even in the best of economic times. Convincing them that they have a direct impact on the business, and making sure that they share in its success – which, after all, depends on them – are ways to encourage and reward employees. Over the years, business owners have learned that one of the most effective ways to accomplish these goals is through the use of a profit sharing retirement plan.
Profit sharing plans offer benefits for both employees and employers. Under a typical plan, the employer makes contributions from profits to plan accounts established for individual employees. The amount of the contributions is based on the level of profits for a given year. When they retire, employees are entitled to the profit sharing contributions along with any account earnings that have accumulated over the years. It is not unusual for a profit sharing plan to be coupled with a 401(k) salary deferral plan. This allows employees to make tax-favored contributions of their own to the plan, which potentially helps them build up even more retirement funds for the future.
In general – and especially in times of economic uncertainty – a small or fledgling business may be hesitant to set up an employee retirement plan that will require contributions to be made every year. With a profit sharing plan, there is no such requirement. The employer is able to choose, based on how the business has done in a particular year, whether to make a contribution to the plan. If the business is not in a financial position to contribute to the plan, no contribution is required. Or, an employer might decide to reduce the size of the contribution he or she had hoped to make. A profit sharing plan offers this flexibility.
With a profit sharing plan, the employer benefits because contributions to the plan are deductible (as long as the relevant tax law requirements are met). The sponsoring employer also benefits because employees realize that their employer has made a commitment to them. They feel they have a stake in the business, which can improve morale and even reduce employee turnover. Long term, that can boost the business’ profitability, too.
A profit sharing plan is established for the exclusive benefit of employees or their beneficiaries and must not discriminate in favor of highly compensated employees. Certain tests regarding coverage and the eligibility of employees to participate must also be met.
Employees reap various benefits in addition to the potential build-up of retirement funds. One benefit is the tax advantage that comes with a profit sharing plan. Contributions made to such a plan are generally not taxable until employees receive distributions from the plan when they retire (or under certain other conditions). Plan earnings are also not taxable while they are held by the plan. And an owner-employee can benefit in the same ways as other employees, as long as the tax law’s nondiscrimination rules are followed.
We have worked with many businesses over the years in setting up profit sharing plans to benefit their employees. If you would like to look into the potential benefits of a profit sharing plan – for your employees and your business – please give us a call.