Chapter 17
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. What Is It?
B. When Is It Indicated?
C. Advantages
D. Disadvantages
E. Design Features
1. Employer-Contribution Arrangements
2. Allocation to Participant Accounts
3. Vesting
4. Distributions
F. Tax Implications
G. Alternatives
H. How To Install A Plan
I. Where Can I Find Out More About It?
J. Questions And Answers
K. 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.
QUESTIONS:
1. Which one of the following provides the greatest amount of flexibility for employer profit sharing plan contributions?
a. a discretionary provision
b. a formula provision
c. a money purchase paired plan provision
d. 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 After the minimum two-year holding requirement, what amounts may be withdrawn from a participant’s profit sharing plan account prior to retirement or termination?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. 100% of account assets
b. no more than 25% of the account’s current value
c. an amount not to exceed the participant’s vested account balance
d. 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. (1) and (3) only
b. (1) (2) and (3) only
c. (2) (3) and (4) only
d. (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?
a. all amounts in the plan may be used
b. all amounts that have been in the plan for at least two years may be used
c. no amount of plan assets may be used
d. no more than 50% of plan assets may be used
Chapter 17, p. 159
ANSWERS:
1. a
2. c
3. d
4. b