Few days ago, a friend emailed and asked about my advice on operating a small business profit-sharing plan. Below is one of the emails I sent him. I don’t know whether you know what a profit-sharing plan is. It is a good an legitimate way to give the employees a share in the profits of the company. If you are a business owner, you can think about running a profit-sharing plan for your company.
If you are an employee, you’d better to participate in the profit-sharing plan of the company you work for, because it is a great way to guarantee some income for your future and retirement. I know that you are learning to become a forex trader, but many of you have not been able to do it yet and still need some time to learn and practice. Even if you are a profitable forex trader already, chances are you already have a company, or you still work for a company. Therefore, it is good to know what a profit-sharing plan is, and how it can be operated. Here is my email to my friend:
Now that you have created a profit sharing plan, you must exercise responsibility to keep it going, unless you hired someone to build it. Likewise, you may turn the operations of the plan over to a financial institution or insurance company.
Deploying a Profit Sharing Plan
There are certain factors to consider when operating a profit sharing plan:
- Who participates in the plan
- Amount of contributions to be made
- A vesting schedule to be used
- Avoiding discrimination
- Planning of funds investment
- Assigning executor’s responsibilities
- Informing participants
- Filing government reports
- Making distributions
Participation in a profit-sharing plan typically includes managers, owners, and employees who are 21 or older, completed at least one year of service (two in some plans), and who are not covered by collective bargaining agreement that prohibits plan participation. Senior citizens cannot be excluded because of their age.
Contributions and Vesting
As for contributions, you can decide on the amounts you will make on behalf of your participants. You are free to raise or lower contributions according to the level of business profitability from one year to the next or you may choose not to make contributions at all. The amount of contributions made to each employee is typically the same percentage of their pay as compared to the total amount of company payroll expense within a pay period.
Terminated participants that were non-vested, pose yearly limitations when it comes to employer contributions and forfeitures. The limit is 100% of the worker’s pay. Likewise, businesses are able to deduct amounts of 25% or less of aggregate compensation meeting this limitation. Every year the limitations may change so it’s best to obtain current data.
When drafting up a profit-sharing plan, you may elect that contributions are to be nonforfeitable, vested with time by adhering to a vesting schedule. But if your plan calls for a minimum of two years of service from participants, all contributions are vested immediately, according to plan terms.
To take advantage of tax benefits, your plan needs substantive benefits for regular employees also-not only managers and partners. These nondiscrimination rules compare low-end workers with management staff. Hence, these plans are tested each year to ensure no discrimination in favoring workers on the administrative level takes place. In the event the plan system appears to be fair amongst all participants, annual testing is not needed.
Investment of the Funds
Once the profit-sharing plan is in place, you are free to choosing a method of investing its funds. You must decide if you will allow your employees to make investment decisions or manage the funds for them. If participants are to decide, you will want to determine what investment options exist. If not, it is best that you hire someone to manage the investment monies or determine which investment choices are available. By controlling the investment options yourself, you can be assured that the options you pick are in the best interest of the plan and its participants.
All fiduciaries are trustees in respect to the participants and their beneficiaries. Fiduciary responsibilities are: to act only in interest of the participants; provide benefits for members; defray reasonable expenses; function with great skill, care, diligence, and prudence; stick with the plan’s rules; and invest in a variety of sources. Hence, if you’re in charge of the profit-sharing plan, you still may want to seek out the help from accountants and investors.