Is Profit Sharing Right for Your Business?

It is commonly known that employee performance is directly linked to how happy they are with their position and company. Job perks are a significant contributing factor to this happiness and a crucial way to attract top talent. Competitive benefits can be a powerful incentive for employees to work harder for a business, and one perk that is gaining momentum is profit sharing.

What is Profit Sharing?

Profit sharing has become a recent trend in the employee retirement-plan universe as 401(k) plans continue to dissipate. The variable pay plan is designed by company leadership who designates a percentage of annual profits as either a pool of cash or rewards of stocks and bonds to share with employees. Compared to a 401(k), profit sharing contrasts in several profound ways: contributions are only made by the employer; the amount is based on a percentage of the employee’s current salary rate; and profit sharing plans are more lenient about withdrawals. Overall, this is highly attractive to employees and allow for more flexibility than more traditional retirement plans.

How to Build a Profit Sharing Plan

The beauty of profit sharing is it can be different depending on the company. As a business owner, you can tailor the retirement plan to work well with the structure of your company. When creating a profit sharing plan, the Department of Labor recommends adopting a written document; arranging a trust for the plan’s assets; developing a recordkeeping system and providing plan information to eligible employees. In addition to the DOL’s recommendations, this information should be included in the company’s employee handbook.

Pros and Cons of a Profit Sharing Plan

This retirement plan format can be a great incentive to attract top talent within your industry. It also encourages employees to work together as a team, as the more profit they generate, the larger the pool of money is at the end of the year. A profit sharing plan is also flexible during its creation stages, allowing it to be a worthy consideration for businesses of all sizes. Depending on how well the profit sharing system is designed, it can be a rewarding system that promotes employee performance, growth, loyalty and collaboration.

Every retirement package comes with disadvantages, and profit sharing may not be the right option for every company. For example, this style of retirement plan makes it difficult to reward individual employees for outstanding work. Smaller companies may find greater success without profit sharing, as tying employee compensation to uncertain profits may cause a larger disparity in income from year to year. Depending on company culture, a profit sharing plan can entice employees to focus solely on increasing profitability at the sacrifice of quality.

After creating the profit sharing plan with the necessary documents, it becomes legally binding and must be followed exactly. While a business may alter its plan, they must do so through the proper, legal channels. Therefore, it is recommended to consult an attorney when creating such policies to ensure your business remains legally secure.

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