Profit Sharing or Defined Contribution Plan
To further incentivize the employees, employers can provide an additional discretionary contribution. The company’s contribution cannot exceed 25% of the total compensation of all eligible employees. The IRS also has annual contribution limits for this plan. Profit-sharing plans are inherently performance-based. Employees receive a share of the profits based on the company’s financial performance, rewarding their collective efforts in contributing to the company’s success. The employer’s contributions to this plan are subject to a vesting schedule, ensuring that employees gain ownership over these contributions based on their years of service in the company.
This benefits both the employers and the employees to maintain a stable and committed workforce. Contributions to the profit sharing plan are generally pre-tax and tax deferred to employees. Employers benefit by taking a tax deduction of all contributions provided to the employees to reduce the corporate tax liability.