A profit-sharing plan, also known as a deferred profit-sharing plan (DPSP), is a retirement plan that gives employees a share in the profits of the company as an incentive. Profit-sharing plans give employees a sense of ownership in the company and often encourage them to work harder or more diligently as they have a financial stake in the success of the company. The company decides how much it will pay into the plan and employees receive a percentage of profits that is based on the salary level of the participant.
The employer’s contribution into the account and any earnings accumulate on a tax-deferred basis. The funds are only taxed when they are withdrawn from the fund, usually at or after retirement age or when employment has been terminated by either party. There are penalties for withdrawing the money early if an employee is still working at the participating company. Most profit-sharing plans feature a vesting schedule which is usually between three and six years. During this time, an employee will become fully vested in the plan.
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