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Before I offer a profit sharing plan, I need to understand the risks and the rewards.

Profit Sharing

A profit sharing plan can help enhance goodwill and a sense of partnership between your employees and your business. Profit sharing plans may be offered in conjunction with the firm’s 401(k) salary deferral plans. These plans can serve to help attract and retain high-caliber employees that make a meaningful impact on your business. The employer can also establish a preferred vesting schedule for the plan. A profit sharing plan bolsters employees’ financial stake in the company and helps them in funding their retirement. Cutter & Company will work with you to develop a plan that meets your business and personnel needs.

MONEY PURCHASE PENSION PLANS (“MPPP”)

These plans define the pension contribution – not the benefit. Beginning in 2002, the tax advantages of these plans over the profit sharing plan option was eliminated. If your firm still has a MPPP, it may be wise to consider converting it to a Profit Sharing Plan, which then provides the employer with flexibility in determining plan contributions from year to year.

DEFINED BENEFIT PLANS/CASH BALANCE PLANS

A Defined Benefit Plan promises to pay participants a specific monthly income when they retire. The amount of benefit is typically based on an employee’s pay and their years of service. A Cash Balance Plan is a defined benefit plan where each participant has an account that resembles a 401(k) or Profit Sharing Plan account. The plan sponsor must make certain that there is enough money in the plan to pay the promised benefits; based on actuarial assumptions about future pay increases, investment performance, years until retirement and life expectancy thereafter.

POTENTIAL ADVANTAGES:
  1. Contributions for executives can be substantially higher than in other retirement plans.
  2. Defined benefit plans tend to favor older, higher paid employees
POTENTIAL DISADVANTAGES:
  1. The promised benefits must be provided to ALL participants, regardless of investment performance. Poor performance or not meeting actuarial assumptions will require increased contributions.
  2. Termination of underfunded plans will require additional contributions to make up the difference. Alternatively, if a plan is overfunded and terminated, an excise tax will apply.