Working of Employer Profit-Sharing Plans
The functioning of Employer Profit-Sharing Plans primarily involves three steps, namely a Deferred Plan, a Cash Profit-Sharing Plan, and a combination of Deferred Money and Cash.
1. Deferred Plan: This plan entails employers distributing contributions at specific times, such as retirement or job termination. Contributions are tax-exempt until received by employees. If withdrawn before the age of 59 and a half, a 10% tax may be applicable.
2. Cash Profit-Sharing Plan: Some companies utilise their plans as an annual cash bonus. These contributions are directly added to employeesâ paychecks and are tax-deductible for the employer but taxable for the employee.
3. Combination of Deferred Money and Cash: This approach amalgamates the benefits of both the deferred and cash options. It is a retirement plan that also grants regular cash bonuses. It might contribute more towards retirement than a traditional 401(k) and can motivate employees.
Remember, in profit-sharing plans, only employers make contributions. They can decide how much to pay each year or even skip a year if profits are not made.
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