Profit-sharing plans allow employees to share in the profits of their company, with each employee receiving a percentage of the company’s earnings. Although the company decides how much the employees will receive and there are restrictions on withdrawals, most employees are grateful and proud to share in the ownership and achievements of their company. A variety of profit-sharing plans for small businesses exist, and many companies find that the benefits outweigh the drawbacks.
Profit-Sharing Plans for Small Businesses
TYPES OF PROFIT-SHARING PLANS
Many employers value the flexibility of profit-sharing plans, because they allow employers to design key features of the plan and make choices regarding contribution amounts (though there are contribution limits, which vary by year). Several different types of plans are available, including the following:
- Traditional Plan: All employees are given a contribution based on a percentage of compensation. The percentage is the same for all eligible employees.
- Age-Weighted Plan: Contributions are allocated based on both the age and compensation of eligible employees. Older participants receive a larger share.
- New Comparability Plan: Employees are divided into groups, and each group receives a contribution based on a percentage of compensation. The percentage for each group does not need to be the same.
BENEFITS OF A PROFIT-SHARING PLAN
- A profit-sharing plan can promote a sense of teamwork and unity within the company. Employees may learn to work harder and pull in the same direction, because when the company benefits, everyone benefits.
- Money contributed to profit-sharing plans can grow through a variety of investment vehicles.
- Employees will appreciate a well-designed profit-sharing plan, and it may help the company retain workers and attract new talent. It can also increase morale and productivity.
- Most employee contributions and earnings are not taxed by the federal or state government until distribution.
- The contribution amount is discretionary and can vary by year, allowing the business owner to contribute less during difficult years and more during prosperous years.
- Administration duties and costs are typically minimal.
ESTABLISHING A PROFIT-SHARING PLAN
To get started, you will need to create or choose a written document to serve as the foundation for your profit-sharing plan. The terms laid out in this document will govern the day-to-day operation of the plan. Then, you will need to create a trust to hold the plan’s assets and select a trustee to manage the trust. Your choice of trustee is crucial. Next, if a financial institution is not assisting in the management of the plan, you will need to develop a record-keeping system to track contributions and earnings, plan investments, and record expenses and distributions. Finally, you will, of course, need to notify all eligible employees of the plan and give a summary plan description (SPD) to all participants.
When you’re ready to get started, contact the experienced business attorneys at Carnahan, Evans, Cantwell & Brown. Over the years, we’ve worked with a variety of different companies, including closely held corporations and family-owned businesses. We would be happy to help you explore potential profit-sharing plans and implement your preferred choice. Simply give us a call at 417-447-4400 to set up an appointment. We would be happy to help.