In today’s world, many companies offer employee profit sharing plans to entice prospective employees to join their team, or to give existing employees the incentive to raise their productivity. There are many different types of profit sharing plans available, so how do you know which one is the best for you company? There are a few key words and catch phrases that you should know before starting your research and look into sample profit sharing plans.

Familiarize yourself with these profit sharing plans key terms to make choosing your profit sharing plan easier:

1. Imagine the key term “cash” when considering a profit sharing plan that hands out money.

2. Put aside savings for your employees with a deferred profit sharing plan.

3. Learn the key ingredients of a combination profit sharing plan.

Action Steps
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Consider a cash profit sharing plan and give an immediate payout

The key word in 'cash profit sharing plan' is 'cash.' A profit sharing plan of this type is a common employee incentive. While it is up to the individual employer, many companies opt to pool the profit sharing money together and give a cash payout at the time of their choice, whether it'd be at the end of the year or quarterly. One of the major drawbacks of this company profit sharing plan is that the government taxes the money once transferred to the employee, lowering the amount that actually goes back to the employees.

I recommend: Learn everything you need to know about cash profit sharing plans from this article from the Beyster Institute. The U.S. Bureau of Labor Statistics has numerous articles for you to browse when you want to learn more about a cash profit sharing plan.

Think deferred when searching for a profit sharing plan for the future

A deferred profit sharing plan is a profit sharing retirement plan in which your employer puts the contribution directly into the retirement account. These accounts usually have restrictions on the amount the business can contribute as well as regulations regarding the length of time an employee has been with the company before withdrawing any money. It is not a good idea to rely on this as a sole means of saving retirement money, because the company cannot guarantee consistent contributions.

I recommend: ProfessionalReferrals not only gives the definition of Deferred Profit Sharing Plans, but also provides other information such as the benefits and features. Mackenzie Financial Corporation has a helpful page defining deferred profit sharing plans as well as giving the contribution limitations.

Combine cash and deferred profit sharing plans when you want the best of both worlds

Combination plans are essentially the best of both qualified profit sharing plans. This option has two parts: the occasional cash payout and the contribution to the employee retirement account. This option isn't as common as it used to be as the focus has turned away from getting smaller amounts of money in two different ways to getting the larger amount of money using one method.

I recommend: When you want to learn about combination profit sharing plans for small businesses, click through Investorguide.com. This comprehensive page not only gives information on combination profit sharing plans, but also other types of plans as well in cash you want to comparison-shop. This article on bBNET has some great information pertaining to the advantages of a combination cash and 401k profit sharing plan.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Consider putting together a brief presentation containing these profit sharing plans key terms, showing it to your employees and give them a vote on which plan you ultimately choose. They will appreciate your willingness to choose the plan that is best for them as well as one that is beneficial to your company.

Profit sharing plans are a type of retirement plan in which the company is the sole contributor. As a business owner, you can choose how much or how little to contribute to your profit sharing retirement plan each year. In fact, you don't have to contribute any money at all if you don't want to. This allows you some flexibility in case of a bad year. Contributions to the profit sharing plan are tax deductible too, all the way up to 25% of compensation. The employee gradually gains ownership over contributions made on his behalf to profit sharing plans.

In order for your employees to qualify for a profit sharing retirement plan, they must not belong to a union and must be permanent residents or legal aliens. To start a profit sharing plan a company must be a sole proprietorship, partnership, or limited liability corporation and must file before December 31 of that fiscal year.

Before deciding to start a deferred profit sharing plan you should decide the following:

1. How long employees will have to work for your company before they become eligible for the profit sharing pension plan.

2. Establish a contribution schedule. For example, a 0% contribution the first year and 20% each year after that.

3. Plan out eligibility requirements for your company profit sharing. These can be less restrictive than the government's requirements, but not more.

Action Steps
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Ask financial companies where they're investing the money you contribute to profit sharing

It's important to know what kind of return and investment opportunities are available for your profit sharing pension plan and what's being done to make your returns safe and profitable. Ask each company exactly how they approach investing your money in the profit sharing plan.

I recommend: Check out Wells Fargo's sample profit sharing plans to see which investments they make. State Farm and Charles Schwab have information on profit sharing plans for small businesses.

Consider a 401k profit sharing plan

This plan is a version of a traditional profit sharing plan, but includes a 401k as well. An employee can choose to have his 401k profits added to his profit sharing plan. This type of plan is great for a company that wants its employees to be able to contribute, too.

I recommend: Download a white paper from Shareholder to see a couple of different takes on a 401k profit sharing plan and common options available. They include sample profit sharing plans.

File a form 5500 each year with the IRS (Internal Revenue Service).

This is an annual report on your profit sharing retirement plan, detailing how much was contributed to each of its recipients.

I recommend: The US Department of Labor allows you to download form 5500 for your qualified profit sharing plans and offers a brief overview. For tips on filing your 5500 form, check out the IRS filing website on a profit sharing plan and the 5500 form.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Profit sharing plans for small businesses are a great way to attract new or valuable employees while still providing the flexibility needed to help a small business get by.

Company profit sharing plans are a great way to reward or give incentives to your current employees as well as attract new talent. These plans aren’t for every business, though. It is important that you gather as much information as possible ahead of time and become well versed in the profit sharing plan's basics before making any decisions that will affect your employee’s pay and maybe their retirement plans as well.

When you are thinking about offering employee profit sharing plans, the first step is to educate yourself on the basics of the idea. Here are some things to consider:

1. Weigh your options when it comes to beginning a company profit sharing program.

2. Pick the right one for your company and the state of the economy.

3. Ensure you are getting the most out of the plan by following all of the necessary tax rules to get the deductions.

Action Steps
The best contacts and resources to help you get it done

Decide if company profit sharing is right for your business

Choosing whether to start employee profit sharing plans at your company is a big decision. As with most business decisions, there are positives and negatives. For example, a profit sharing plan is a great way to reward employees for their hard work and often leads to higher productivity. On the other hand, while you are rewarding those employees who are hard workers, you are also rewarding those workers who do enough work to get by and make others pick up their slack. It is important to weigh both sides of the coin before making your decision.

I recommend: Look no further than Referenceforbusiness.com when you want to learn more about how a profit sharing plan can work for your company. The National Federation of Independent Business is a great resource to help you make the decision on whether or not you are going to implement a profit sharing plan.

Sample profit sharing plans of different types

Once you have decided to take the plunge and institute a company profit sharing plan, the next step is to decide which one is the best one for your needs. There are a few options to choose from. Some of the most common are a 401k profit sharing plan where it is the employees' retirement plan as well, or something like a cash profit sharing plan, in which money is paid out in either bonus checks or added pay, if the company is doing well.

I recommend: AXA Equitable Life Insurance Company has this very informative list of the different kinds of profit sharing plans available to help you decide. Check out Profit Sharing / 401k Council of America for easy-to-understand definitions of the different types of profit sharing plans as well as links to further information on them.

Research tax facts regarding profit sharing plans for small businesses

The government wants to encourage company owners to begin a profit sharing retirement plan for small businesses, so there are tax deductions available. One of the most important things you have to do in order to get these tax deductions is to fill out a Form 5500, which itemizes how much money went into every employee profit sharing plans.

I recommend: Look to one of the authorities on taxation, U.S. Department of Labor, to get your questions answered. Fidelity has a helpful FAQ page that will explain all of the relevant tax information in layman’s terms.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  As a way to encourage new employees to stay with the company, set up a plan where they have to work for the company for a minimum amount of time before being able to take advantage of the company's profit sharing plan.