Module 6e: Profit-sharing Plans
There are three basic approaches to funding profit-sharing plans. They are:
- Current (cash): profits are paid directly to employees in cash, check, or stock as soon as profits
- Deferred: profits are credited to employee accounts to be paid at retirement or upon other
stated circumstances such as disability, death, severance, etc.
- Combined: part of the profit is paid out currently in cash and part is deferred.
Employer contributions to profit sharing plans may be made on a discretionary basis (as determined
annually by the board of directors) or in accordance with a definite predetermined formula.
David's employer has a profit-sharing plan.
- How will David know how much his plan will "grow" each year?
- Will David have enough money for retirement?
- The amount will vary depending on the following:
- The amount of employer contributions that might be zero for some years.
- Earnings on the investments
- Maybe. The employer does not have to contribute every year so David should have other retirement
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