Quiz 6: Profit Sharing Plans and Money Purchase Pension Plans
Profit sharing plan In profit sharing plan the amount of company's contribution to plan depends on the amount of profit earned by company irrespective of benefit payment made which could be in cash, deferred or combination of two. There are three basic profit sharing plan which are current plan where profits are paid directly to employees, deferred plan where profits are credited to employee account which is paid at retirement and combined plan which include current and deferred payment. Following are some of the conditions based on which employer made desire profit sharing plan: When employer needs flexibility in terms of contribution to be made to retirement plan profit sharing plan would be preferred. If employer's profits are fluctuating and generally lower or loss making then they would prefer profit sharing plan as in those period employer may not contribute to the account. Employer has flexibility with the type of payment to be made that is current, deferred or combination which is not available with other plans.
Pension plans refers to plans that are designed to provide retirement income to the employees after retirement. One such method of pension plans is Defined Contribution Plan under which the employer and employee both makes contribution towards investing for retirement income. However, the maximum contribution is usually made by the employee and a fixed amount by the employer and the accumulated amount is made available to the retired employee. The retirement income is variable under this method. Defined Contribution approach can be adopted by employers in various ways to design the employee's retirement plan. One such method is Profit Sharing Plans (PSPs). PSP is a method of defined contribution plan which involves sharing of profit by the employer with its employees. This contribution by the employer is directly based upon the profit earned. It can be distributed in cash or deferred payment and sometimes in a combination of both. The participation requirement of an employee in PSPs includes both- 1. Minimum age requirement which should be above 21 years 2. Service requirement of at least 1 year. For an employee to participate in Profit Sharing retirement plan by the employer needs to fulfil these two minimum criteria so as to become a beneficiary.
The principal feature available that would improve the employees' reaction without increasing the employer's annual cost would be an option to make loans or withdrawals from their individual accounts prior to termination. Another possibility would be to allow employee contributions, perhaps on a tax-deductible basis through a cash or deferred arrangement (Chapter 8).