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A profit-sharing agreement
in the United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
is the agreement that establishes a pension plan maintained by the employer to share its profits
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
with its employees.
A profit-sharing agreement used to be supplemental to a type of pension called a defined contribution plan. For example, if an employee should become ill or incur economic hardship, then access to some or all of profit sharing account would prevent the employee from quitting
Today, most newer companies only have profit-sharing plans and don't have defined benefits plan.
The Treasury regulations to the Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
sets out the requirements for a profit-sharing agreement. The agreement must use a predetermined formula for allocating and distributing the profits. Then the agreement must set out whether allocations may begin after a fixed number of years, attainment of certain age or prior occurrence of some event.
The agreement must be tied to the basic compensation of the employee by allocating a profit sharing amount to the employee's account based on the proportion of the employee's salary to the total salary of the participants.
An employer does not need to earn profits to have a profit-sharing agreement. Contributions under the agreement need not be based on profits but rather salary and a phantom profit amount. This phantom profit originates from a predetermined formula for allocations under the profit-sharing agreement.