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Simple English definitions for legal terms
qualified profit-sharing plan
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A quick definition of qualified profit-sharing plan:
A qualified profit-sharing plan is a type of employee benefit plan that allows employees to share in the profits of their company. The plan is governed by ERISA and provides for discretionary employer contributions, which are allocated to participants based on a predetermined formula. Contributions are often based on each participant's compensation. In a qualified profit-sharing plan, the employer's contributions are not taxed until distribution, and the employer is allowed to deduct the contributions.
A more thorough explanation:
A qualified profit-sharing plan is an employee benefit plan that allows employees to share in the profits of a company. The plan is governed by the Employee Retirement Income Security Act (ERISA) and provides for discretionary employer contributions. Contributions are allocated to the plan among the participants based on a definite predetermination formula, often in proportion to each participant's compensation.
One example of a qualified profit-sharing plan is when a company sets aside a portion of its profits to be distributed among its employees. The amount each employee receives is determined by the formula set forth in the plan. Another example is when an employer contributes a percentage of each employee's salary to the plan, which is then distributed among the participants based on the predetermined formula.
These examples illustrate how a qualified profit-sharing plan allows employees to share in the success of the company and provides a tax advantage to both the employer and employee.