What is a profit sharing plan?
A profit sharing plan is a defined contribution plan to which the employer agrees to make “substantial and recurring” contributions although generally discretionary. Amounts contributed to the plan are invested and accumulate tax deferred until distribution to participants or their beneficiaries either at retirement, or upon the occurrence of some specified event, such as, disability, death, or termination of employment. A profit sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants. This formula may either be integrated, or non-integrated. An integrated formula provides an additional allocation for compensation in excess of a certain level. The integrated allocation formula and excess compensation level must be defined in the plan document. A non-integrated formula provides a pro-rata allocation, based on the ratio of each participants compensation to the total compensation of all participants. As with other
