Chapter 17
PROFIT SHARING PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of profit sharing plans
B. Identify key tax-related factors for profit sharing plans
REVIEW:
This chapter covers the basics of profit sharing plans. Specific types of plans are
discussed in other chapters, so the focus here is on describing profit sharing
plans in general. The chapter begins by defining profit sharing plans and
describing when they might be used. Advantages and disadvantages are
discussed next. A fairly comprehensive section on design features is next. This
section focuses on employer contribution arrangements, allocation to participant
accounts, vesting, and distributions. A section on tax implications is followed by a
discussion of alternatives. As has been the practice in previous chapters, there is
a reference for learning more, and instruction to check Chapter 10 for plan
installation information. The chapter ends with a question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features
1. Employer-Contribution Arrangements
2. Allocation to Participant Accounts
3. Vesting
4. Distributions
F. Tax Implications
1
Chapter 17
G.
H.
I.
J.
K.
Alternatives
How To Install A Plan
Where Can I Find Out More About It?
Questions And Answers
Chapter Endnotes
FEATURED TOPICS:
Profit sharing plans
Tax-related profit sharing plan design features
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
1. Defined contribution
c. Profit sharing
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of profit sharing plans
2. Identify key tax-related factors for profit sharing plans
KEY WORDS:
profit sharing plan, discretionary provision, formula provision
DISCUSSION:
1. Discuss reasons why employers might want to implement a profit
sharing plan, while employees might prefer a pension plan.
2. Discuss the rationale behind the different vesting schedules and why
an employer might choose one vesting schedule over another.
Chapter 17
QUESTIONS:
1. Which one of the following provides the greatest amount of flexibility for
employer profit sharing plan contributions?
a.
b.
c.
d.
a discretionary provision
a formula provision
a money purchase paired plan provision
a target benefit provision
Chapter 17, p. 154
2. After the minimum two-year holding requirement, what amounts may be
withdrawn from a participant’s profit sharing plan account prior to retirement
or termination?
a.
b.
c.
d.
100% of account assets
no more than 25% of the account’s current value
an amount not to exceed the participant’s vested account balance
an amount not to exceed the entire account balance, as long as hardship
requirements have been met
Chapter 17, p. 156
3. Assuming a plan remains qualified, on which of the following amounts are
income taxation deferred?
(1) employer contributions
(2) forfeitures added to the participant’s account
(3) investment earnings on the account
(4) capital gains realized in the account
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 17, p. 157
4. Qualified plans require that the purchase of life insurance be governed by
what are described as “incidental limits”. What is the limitation on purchasing
life insurance in a profit sharing plan?
Chapter 17
a.
b.
c.
d.
all amounts in the plan may be used
all amounts that have been in the plan for at least two years may be used
no amount of plan assets may be used
no more than 50% of plan assets may be used
Chapter 17, p. 159
ANSWERS:
1. a
2. c
3. d
4. b