Profit Sharing Plan

A profit sharing plan is a defined contribution retirement plan that businesses should consider when they're ready to offer a retirement plan to their employees.  A profit sharing plan allows the employer to share the business profits with their employees.





Generally businesses come up with a definite formula for figuring the amount of profits to share with their employees.  Employers are free to change this formula each year.





A definite formula is required for the following:

• determining how to allocate the contributions among all the participants


• determining how to distribute the funds accumulated after a fixed number of years, the attainment of a certain age, or upon the prior occurrence of some event such as a layoff, illness, disability, retirement death, or severance of employment.

Forfeitures can be allocated to the accounts of remaining participants in a nondiscriminatory way or they can be used to reduce employer contributions.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Company Provided Qualified Retirement Plans

Your company may decide to offer it's employees a qualified retirement plan. Sole proprietors, partnerships and corporations can set up qualified retirement plans.  A qualified retirement plan is one that meets certain IRS provisions and either:

• provides retirement income to employees or


• provides a deferral of income to employees.

Qualified Retirement Plans are either:

• Defined Contribution Plans (like profit-sharing plans or 401(k) plans) or


• Defined Benefit Plans

Defined Contribution Plans provides benefits to the participant in the plan based largely on the amount contributed to that participant's account.

Defined Benefit Plans are any plans that are not defined contribution plans.  The employer would make contributions in the amount needed to provide certain future benefits to participants.

Qualified Plans have the following things in common:

• Employers can deduct the contributions they make and employee elective deferrals, subject to limitations.


• An employee must be vested in benefits under a minimum vesting schedule.


• The plan is for the exclusive benefit of employees or their beneficiaries.


• Participants pay no current income tax on amounts contributed.


• Earnings from contributions accumulate tax free until they are withdrawn.


• Some withdrawals may qualify for tax-free rollover treatment into another qualified plan or IRA

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Employer Provided IRA Plans

As I stated in my previous post employers should consider offering a retirement plan to their employees.  In this post I'm going to provide an overview of the following IRA plans:

• Simplified Employee Pension (SEP-IRA)


• Savings Incentive match Plan for Employee (SIMPLE-IRA)


• Payroll Deduction IRA (Traditional IRA)

	SEP	SIMPLE	Payroll Deduction IRA
Eligible Employer	Any employer	·       100 or fewer employees with $5,000 or more in compensation ·       No other qualified retirement plan is maintained	Any employer
Employee Eligibility	·       At least 21 years old ·       Employee for at least 3 of the last 5 years ·       Has received at least $550 in compensation in 2009	Any employee who received at least $5,000 in compensation during any two years preceding the current year and is expected to receive at least $5,000 in the current year	All employees
How to Set Up	1.     Prepare IRS Form 5305-SEP 2.     Provide each eligible employee with information about the plan 3.     Establish a SEP-IRA for each eligible employee	1.     Prepare IRS Form 5305-S 2.     Prepare IRS Form 5305-SA 3.     Establish a SIMPLE IRA for each eligible employee	The employer arranges for the payroll deductions and transmits the employee’s contributions to their IRA.
When to Set Up	Anytime up to the due date of the employer’s return including extensions	Effective on any date from January 1 through October 1 of a year for which contributions will be made	Employee decides
Contributions	·       Employers must contribute a uniform percentage of pay for each employee ·       Employers do not have to contribute each year ·       Contributions must be based on a written allocation formula that does not discriminate in favor of highly compensated employees	Employer is generally required to match each employee’s elective deferrals on a dollar-for-dollar basis up to 3% of the employee’s compensation	Employee decides whether to contribute and when to contribute
How much to Contribute	For 2009, contributions cannot exceed the lesser or 25% of the employee’s compensation for $49,000	·       Employee may defer up to $11,500 in 2009 and 2010 ·       Employers generally match the employee deferral up to 3% of the employee’s compensation	Employee decides

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.

Retirement Plans for Small Businesses

If you own a small business you should consider setting up a retirement plan for yourself and your employees.  If you're an employee of a small business you should ask your employer about the possibility of setting up a retirement plan.





In short the benefits to the owners of the small business include:

• Any contributions employers make to retirement plans are deductible from their business income.


• Contributions made into the plan grow tax free.


• Their business may be able to get a tax credit or other incentive for starting the plan


• Having a retirement plan may make it easier to retain their employees

Benefits to the employees include:

• You don't have to pay taxes on the monies you put into the plan until you take the money back out


• You don't have to pay taxes on any earnings inside the plan until you take it out


• Once vested the money is yours, even if you leave this employer


• Contributions can be made through payroll deductions

In my next article I'll provide overviews of IRA based retirement plans.

Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.