Profit-Sharing Plans for Small Businesses

Profit-sharing plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.

A profit-sharing plan is a type of plan that gives employers flexibility in designing key features. It allows the employer to choose how much to contribute to the plan (out of profits or otherwise) each year, including making no contribution for a year. Employers start a profit-sharing plan for additional reasons:

  • A well-designed profit-sharing plan can help attract and keep talented employees.
  • A profit-sharing plan benefits a mix of rank-and-file employees and owners/managers.
  • The money contributed may grow through investments in stocks, bonds, mutual funds, money market funds, savings accounts, and other investment vehicles.
  • Contributions and earnings generally are not taxed by the Federal Government or by most state governments until they are distributed.
  • A profit-sharing plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.

Establishing a Profit-Sharing Plan

When you establish a profit-sharing plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or consult a professional to help establish and maintain the plan. In addition, there are four initial steps for setting up a profit-sharing plan:

  • Adopt a written plan document,
  • Arrange a trust for the plan’s assets,
  • Develop a recordkeeping system, and
  • Provide plan information to employees eligible to participate.