Profit-Sharing and Similar Plans

1. Profit-Sharing and Similar Plans Chapter 22

2. A. Money Purchase Defined Contribution Pension Plans • Individual account for each employee • Employer is required to to make a specific contribution each year to each employee • Account balance upon retirement determines retirement benefit • Retirement benefits could be either in the form of a lump sum or annuity

3. B. Qualified Profit-Sharing Plans • A profit sharing plan is a qualified, defined contribution plan with a flexible contribution related to the employer’s profit • Plan must use a nondiscriminatory formula • Individual accounts • Employees can contribute to the plan • In-service withdrawals are allowed

4. Maximum employer contribution is 25% of all participants’ compensation • Forfeitures: • can be used to reduce employer contributions • can be reallocated among remaining employees • Participation and vesting provisions: same as other qualified plans • Loans

5. Application: • when employer’s profits vary • an incentive feature • employees are young and willing to accept a degree of investment risk • as a supplement to an existing defined benefit

6. C. Age-Weighted Plans • Section 401(a)(4): allows a higher contribution by employer based on employee age at plan inception or date of hire. • Three different method exist • Cross-tested/new comparability plan • (Fail-safe) age weighted profit-sharing plan • Target plan

7. D. Employer Stock Plans • 1. Stock Bonus Plans • Similar to a profit sharing plan but the benefits are distributed in the form of employer stock and not cash. • Employer contributes either cash or employer securities • Allows employee contributions • Employer contributions must be allocated to individual accounts

8. 2. ESOP • ESOPs are qualified defined contribution plans. • Participants accounts are invested in stock of the employer company • Employer contributions are deductible when made up to 25% of covered payroll