One of the ways that you can attract talented workers to your company is by offering a profit-sharing plan. These plans often provide a degree of flexibility to the business owner, as well as a nice bonus for the workers.
However, as with all plans that involve tax benefits, there are some rules you need to be aware of.
Benefits of a Profit-Sharing Plan for Your Business
One of the biggest benefits to creating a profit-sharing plan for your business is that you can receive a tax benefit. Contributions and earnings are usually tax-deferred, and you can receive a tax benefit for contributing on behalf of your employees.
In addition to contributing on behalf of your employees, your profit-sharing plan can include tax-deferred contributions for management personnel — including you, as the business owner.
Profit-sharing plans are usually quite flexible. As long as you meet the requirements for nondiscrimination, it’s possible for you to design the plan according to your desires, and you have a certain amount of flexibility. How much you contribute to your employees is determined year to year, so you can change the amount if the situation changes (which is a change from a defined benefit plan). You can create a vesting schedule, and it’s possible for the money in a shared benefit plan to be kept in a variety of investment vehicles, from stocks and bonds to funds and savings accounts.
Realize, though, that employees don’t usually contribute to profit-sharing plans (there are some exceptions). It’s almost entirely the employer’s domain.
How to Create a Profit Sharing-Plan
While it’s possible to create a profit-sharing plan on your own, as long as you understand the paperwork involved, and you are willing to manage the plan yourself, it might be easier to hire someone else to do it. You can get a specialist to help you create the plan, as well as hire someone to manage the plan, and it can ease some of the administrative burden for your business.
Some of the items you need to consider when you create a profit-sharing plan include:
- Plan Document: You need to have a clear definition of your plan. This plan document should include how you will determine contributions, as well as the ways that the contributions will be deposited. Also, define how employees can be eligible to participate (including vesting).
- Trust for Plan Assets: Realize that your plan has a fiduciary responsibility to your employees. Assets should be held in trust, and that trust should work in the interest of beneficiaries — not your business.
- Record-keeping: This is where a plan administrator can help out a lot. You need to keep good records of the assets, as well as other important transactions and employee participation. A good administrator can help you manage this aspect of the profit-sharing plan, as well as manage the assets you have in trust.
Before you offer the profit-sharing plan, make sure you have a good understanding of the benefits involved, and that you know how to avoid some of the pitfalls. If you have a small number of employees, and you want a tax benefit for contributions to their plans, as well as one for boosting your own retirement efforts, a profit-sharing plan, properly set up, can be a good choice.
For more information, consider Department of Labor information on the subject.