What is a profit-sharing plan and what kind of account does it reside in?

What is a profit-sharing plan and what kind of account does it reside in?
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#1

What exactly is a profit-sharing plan? I thought I had opened a 401k with my old employer, but the statements I’ve been receiving say profit-sharing. Even more unusual, it looks like they are contributing, because the amounts of gone up even though I’m not contributing. Am I missing something here?


#2

A profit sharing plan is usually offered by an employer.  Typically it is linked with a 401k plan.  Each year the employer has the option of putting in company money on behalf of their employees in the form of a profit sharing contribution.  Usually these funds are subject to a vesting schedule meaning even though profit sharing dollars can be allocated to an employee/participant, they must work there for a defined period of time to receive it or vest.  Most of the 401k/profit sharing plans I deal with have 3 components,:

1) employee deferrals

2) employer match

3) profit sharing

If you have a plan with all of these features, the balances will still alll be in one account and usually invested together directed by the participant.  If you were a participant in a pooled profit sharing plan, then the employer would direct the funds.


#3

Employers can offer a 401k with a match and a profit sharing contribution. The contribution does not impact the amount you can put into you 401k. 

The profit sharing contribution is a separate amount that is based on discretionary amounts the employer wants to put in the plan for the benefit of all the fulltime employees. It is allocated based on a percentage of salary. So you are fortunate.

Most employers who do this are doing it so they can also maximize contributions to their own account. The pricetag of doing that is the contribution they make to all eligible participants. So you are fortunate you qualify. This will help you reach your accumulation goals faster. Congrats.


#4

It sounds like you may have a straight profit sharing plan that allows for employer discretionary contributions. It may be without a cash or deferred arrangement (CODA), which would allow you to defer compensation into the plan. If so, employers aren't required to fund the plan every year, but instead can do so at their discretion.

On your statement, you should have the name and number of a person to call with questions. I suggest you call the number and speak with the individual asking them to explain the plan to you. Additionally, ask them to email or mail you a Summary Plan Description (SPD), which will provide info for you on the plan to file.

As info, it is common for the contribution formula to be "comp for comp", which allocates the company's contribution to plan participants in the same ratio that their compensation has to the total participant compensation. Aside from this traditional formula, an integrated, age weighted or new comparability formula can be used, each of which would lead to a different contribution amount. Your SPD should lay out the formula used to calculate your contribution.

Profit sharing plans are required to have a trust established to hold plan assets. This will be a plan trust and not an individual trust. Trustees of the plan are individuals who have fiduciary control over the plan and its assets.

Hope this helps...


#5

Good answers ahead of me. One thing they all omitted that you need to do. Either find the Summary Plan document you were given when you first joined the plan or get one from your Human Resources person. The Summary describes in layman's language how the plan works. It will tell you about making contributions, what additions your employer may make to your account and, most importantly, it will tell you what money is yours and what goes back to the company should you (or they) decide to leave the company.

More and more companies today are giving up the old "we'll pay you so much for life at retirement" type of retirement plans. Those plans are being replaces by Profit Sharing and 401(k) plans. Throughout your work life, you may accumulate balances in your various types of plans. It is your responsibility to keep track of those various balances and manage them in a manner that will provide you with sufficient funds to retire at some point in the future.


#6

Profit-sharing plans represent various retirement accumulation structures recognized by the Department of Labor and IRS whereby employers can help employees build retirement savings through assorted contribution and tax-advantaged mechanisms. Assets are held in retirement-based account structures which reflect the nature of the underlying plan. In many cases, the investment assets in these plans can be rolled-over to other retirement accounts. For instance, investments in a 401(k), or the underlying cash if liquidated, can generally be rolled over to an IRA without a problem. Plan Administrators are in a position to help participants make the appropriate ‘transfer’ choices for their respective plans. More detail can be found on this link:

http://www.dol.gov/ebsa/publications/profitsharing.html



#7

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