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Proft Sharing Plans A profit sharing plan is a defined contribution plan in which the employer is not required to make an annual contribution to each employee's account regardless of the firm's profitability for the year. This flexibility is the distinguishing characteristic of a profit sharing plan. Annual contributions are usually determined at the discretion of the employer on an annual basis although there are a number of other approaches. Contributions are credited to participants’ accounts under the plan. Prior to 2002, there were higher contribution limits for money purchase pension plans than profit sharing plans and profit sharing plans were combined with money purchase plans in order to maximize contributions to a defined contribution plan. Since 2002, the use of money purchase pension plans has decreased substantially since profit sharing plans allow for the same level of contributions and have added flexibility. As with any tax-qualified defined contribution plan, contributions and earnings in a profit sharing plan accumulate tax-free until withdrawn by the participant. |
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