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IDear Workforce-I How Do I Implement Profit Sharing

It depends if it's qualified or non-qualified. With non-qualified, there's a lot of flexibility.
September 20, 2000
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Related Topics: Compensation Design and Communication, Dear Workforce, Compensation
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Q

Dear Workforce:

We are a small company (45 employees) with revenues under 10 million.We are looking to implement a profit sharing plan. Do you have any resourcesthat might help us in modeling this plan? Specifically I have questionsconcerning:

  • Who is eligible toparticipate?
  • Should management besubject to a higher percentage of the plan bonus?
  • Should the bonuses bepaid out quarterly? Annually?

-- Diane A. Flood, director of humanresources, Century Software, Inc.

A DearDiane:

First, the definition of "profit sharing": A plan providing foremployee participation in the profits of the organization. The plan normallyincludes a predetermined and defined formula for allocating profit shares amongparticipants, and for distributing funds accumulated under the plan.

However, some plans are discretionary -- thereby allowing ownership moreflexibility. Funds may be distributed in cash, deferred as a qualifiedretirement program or distributed in a cash/deferred combination.

If the plan is to be structured as a qualified retirement program, therebyallowing the company an immediate deduction for the deferral and there is norisk of forfeiture (even in bankruptcy) to participants, everyone HAS toparticipate and the formula HAS to be basically the same for everyone.

These are great, but they require significant paperwork and compliance withthe IRS -- but that is why Uncle Sam allows the immediate deduction andprotection from bankruptcy.

If it's structured as a "non-qualified" plan, then flexibility ishuge (you can give more to the executives and you don't have to includeeveryone) BUT the company will not receive a deduction UNTIL the participanthas W-2 income. In addition, ALL participants will be subject to risk offorfeiture, so bankruptcy would be a "bad thing," for all involved.

Technically, in the event of bankruptcy, the participants would becomegeneral creditors of the organization and hope and pray that they wouldeventually get some, if not all, of their money back.

For these types of plans, due to their complexity and all the various waysof design, companies should:

  • Get as much research aspossible (a good resource is WorldatWork (formerly the AmericanCompensation Association at www.worldatwork.org)
  • Get a professional to helpset it up and administer.

SOURCE: Brent M. Longnecker, executive vice president, Resources Connection,281-618-8812.

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 The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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