Employers today can select among a variety of profit sharing plans. With traditional profit sharing plans, employers are not required to contribute a specific percentage or to make a contribution every year. Profits are not required for employers to make a contribution. However, contributions must be "recurring and substantial," as designated by the IRS.
How the Employer Benefits:
- Contributions are tax deductible
- Contributions and costs are flexible
- Forfeitures of terminating employees can be reallocated among the accounts of those in the plan
- Some plans can provide employees with permanent life insurance benefits
- Investments can be directed by employer
- Social Security coordination can reduce contributions for rank and file employees
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How Employees Benefit:
- Employer contributions are not taxed
- Earnings are not currently taxed
- Participants can have the right to direct investments
- Participants may also have other Individual Retirement Accounts (IRA)
- The ability to purchase significant life insurance is sometimes an option
- Younger employees can accumulate a larger fund than with Defined Benefit Plan
- Participants may sometimes borrow from the plan within certain guidelines
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