What is profit sharing?
Profit sharing is a non-elective employer contribution to employees’ retirement accounts, typically based on company performance. Unlike matching contributions, which depend on employee deferrals, profit-sharing contributions are made at the employer’s discretion and do not require employees to contribute their own funds.
Despite the name, profit sharing is not limited to for-profit companies. Nonprofits can also offer profit-sharing contributions by allocating funds based on financial performance or predetermined contribution formulas, rather than traditional profits. This allows all types of organizations to reward employees while maintaining flexibility in contribution amounts each year..
How is profit sharing different from employer matching?
- Employer Matching: Tied to employee contributions, with employers matching a percentage of what employees save.
- Profit Sharing: Employer contributions are independent of employee contributions and decided annually.
What are the main types of profit-sharing plans?
- Pro-rata Plan: All employees receive contributions at the same percentage of their salary.
- New Comparability Plan: Contributions vary by employee group, often benefiting specific employee categories. For Betterment, this is only available to plans on the Pro or Flagship level plan.
What are the potential downsides of profit-sharing plans?
Employer contributions may change yearly, affecting employee expectations and long-term savings plans.
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