Profit sharing refers to an incentive scheme set up by businesses in order to provide employees with direct or indirect payments based on the profitability of the company. These payments are separate from the regular salary and bonuses that the employees receive. There are two main goals that employers target in a profit sharing plan: productivity and profits. While the goals of the company are set parallel to those of the employees, the productivity, working capacity, and eventually the profits of the employees will certainly have a significant increase. Learn how to set up a profit sharing plan and promote the financial security of your employees, while they work harder for your business.
•Identify the spending and risks entailed. Remember that profit sharing plans are still qualified for taxes under the Employee Retirement Income Security Act (ERISA). It includes special rules and considerations that should be understood first before going any further. Look into the risks involved, and know the responsibilities or liabilities.
•Decide on the kind of profit sharing plan. Your choice of profit sharing scheme to be used for the company will rely on the kind of employees you have. There may be employees who are willing to work with a professional investment manager who will administer their accounts. If this is the case, then go for a managed plan or a traditional plan which requires a third-party administrator. On the other hand, there may be employees who can manage themselves with as they direct themselves to an account that resembles that of a brokerage. For this, go for a self-directed plan known as daily valuation plan, which in turn has its own accounting system.
•Hire the professionals you need. Aside from accountants, bookkeepers or third-party administrators, you also need to have a trustee who can act as the point-person to whom the plan is entrusted for the benefit of another. You will also need a lawyer who has to make sure that the plan document is written properly.
•Know the plan structure. Since profit sharing plans may differ from size to size, determine the structure the plan will follow. This should be according to the amount of the contribution or the specification of the contribution you need.
•Create a written plan document. Formalize the profit sharing plan by creating a plan document that will serve as the foundation of the sharing scheme. You may have a professional who can assist you on working out your plan document. Another option is to ask for the help of financial institutions. Bear in mind that once you have created a written plan document, you will be bound by the terms and conditions indicated in it.
After setting up the profit sharing plan, be sure to communicate the plan with your employees. In most cases, employers choose to give the proceeds of profit sharing together with the salary. In some cases, employers would prefer to give employees the stock, from which they will profit in the form of dividends or sale proceeds. These are usually dependent on company performance.
Having a profit sharing plan will help encourage employees to work better for the company, since the proceeds of the profit sharing plan will depend on how profitable the company becomes.
