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What employee benefits do profit-sharing plans offer?

WE ANSWER:

Many employees have the opportunity to earn a share of the company's profits under their company's profit-sharing plan, if such a plan has been adopted by the employer. The amount of employee earnings will depend on the profit that the company makes.

Essentially, a profit-sharing plan is the most common type of defined-contribution retirement plans. By definition, under a profit-sharing plan the employer's contributions are predetermined and fixed by the company's board of directors. The profit-sharing contribution amounts are subject to annual adjustments depending on the company's profits for each year.

What an employer maintaining a profit-sharing plan typically does, is pre-determine the share of each plan participant, using a profit-allocation formula. Thus, the percentage of profits is fixed and stays the same, with the figures changing accordingly every year along with the changes in the company's earnings.

Profit-sharing contribution amounts are subject to certain restrictions that vary from year to year.

For 2008, the profit-sharing contribution limits were $46,000 for employees up to age 50, and $51,000 for senior employees over 50. Year 2009 saw a rise in the profit-sharing contribution limits with under-50s gaining the right to make contributions of a maximum of $49,000, and employees aged 50 and over - up to $54,500.

Distributions of profit-sharing plan benefits usually happen when the employee covered under the plan retires, dies, becomes disabled or leaves the job. If workers' employment gets terminated, they can receive the vested portion of the contributions allocated to them, in addition to the earnings on the contributions. If an employee leaves the job before having achieved full vesting, the forfeited amount is distributed among the other participants in the profit-sharing plan.

If any distributions are made before a participant reaches age 59 ½, a 10 percent early withdrawal penalty is imposed on the amount withdrawn. However, the majority of profit-sharing plans provide a loan option.

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