As an employer you can choose the amount you will be contributing, if any, to your employee’s accounts which are tax deferred under the profit sharing plan. When the amount has been declared then a set formula is used to determine how the money will be distributed. The distributions are always made in such a way that the employees who earn more will get a higher pay. However, there are rules and regulations that have been laid down to protect the profit sharing plan.
The Internal Revenue Service (IRS) has the power to punish the plans that grant excess participation of the highest paid employees and owners. This power is given by the top-heavy testing rules to which all the profit sharing plans are subjected. The profit sharing plans are usually combined with the money purchase plans. These are the plans that gave the company the advantage of high limits o-f contribution as well as the flexibility that they have in determining the amount that can contribute. The amounts to be contributed have risen in the recent years. The profit sharing plan can fit very well into your retirement plan if you make the right decision.
First, you need to know that you don’t have to make any profit for you to make the contribution. This is because if you are able to contribute a certain amount the choice is always yours. Once you have established a profit sharing plan for you company then you can also have other retirement plans. You will also be allowed to have a business of any size, there are no limitations. All you have to do is to make sure that you file the Form 5500 on an annual basis.
There are many advantages that come with the profit sharing plan which makes it an ideal retirement plan. The major advantage is that there is a high degree of flexibility when it comes to determining the amount that you will be contributing every year. It is also an ideal plan especially if cash flow is an issue to your business. You just have to make sure that the benefits aren’t discriminative in the favor of the employees who will be highly compensated. It is only the employer who can contribute to this plan.
The profit sharing plan also has several key benefits besides the flexibility. As a retirement plan it will allow you to have tax-deferred choices for investment. It will also be tax-deductible for the contributions that the employer makes. It is usually a simplified record keeping. The employees will also have optional loan provisions. The requirements for you to be a plan sponsor is that you own a company of any size and have income that can offer the plan. The contributions of the employees will not be eligible. It is one of the ideal retirement plans that will allow you to enjoy hobbies such as fitness, yoga, golf and charity. You will also be able to get your yoga equipment with the profit sharing retirement plan.