Profit-Sharing Plan
Candlefocus EditorUnder a profit-sharing plan, the employer may allocate a portion of the company’s profits to the plan on either a quarterly or an annual basis in order to reward employees for their hard work and dedication. The employer has the discretion to choose how much, if any, of the company’s profits it wants to share, though the amount typically correlates with the company’s overall success.
The company makes the contributions to the plan and the employees cannot contribute to the plan. Instead, the employer makes those contributions on an employee's behalf. The money is then placed into an account for the employee and is invested, usually in a variety of mutual funds or securities. The employee may be able to manage the investments in the account, such as when to purchase or sell an asset. At retirement, the employee may be able to begin receiving payments from the plan or leave it in the plan to generate income.
Most profit-sharing plans have vesting eligibility rules, meaning the employee must remain with the company for a certain period of time before he or she can access the profits that were allocated and set aside. This encourages employees to remain with the company and builds loyalty within the workplace.
Overall, profit-sharing plans are a fantastic way for employers to reward their employees with more than just a paycheck and encourage them to work hard and remain loyal. It also gives them an extra incentive to focus on increasing profitability and is beneficial to both company and employee.