Q & A s about. Profit-sharing Plans. Your promotional imprint here and/or back cover.

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1 P l a n n i n g Y o u r B e n e f i t s Q & A s about Profit-sharing Plans Your promotional imprint here and/or back cover. ABC Company 123 Main Street Anywhere, USA

2 It s a win-win combination: You gain a strong employee incentive and tax advantages, but you don t commit your company to make a contribution of any specific amount or to make plan contributions in poor years. You set the contribution conditions. You remain in control. A tax-qualified profitsharing plan can be a clearly advantageous retirement benefit decision for your business. The Flexible Choice Among tax-qualified retirement plans, the clear winner in flexibility is profit sharing. With it, you can keep your options open. You need not commit to contribute a particular percentage of your profits. In fact, you need not commit to contribute at all in any specific year. If you choose, your plan can provide that you will contribute a certain percentage of profits to the plan, but only if your profits exceed a certain dollar amount. Alternatively, your plan can specify that your board of directors has full discretion over plan contributions. So, if you have a low-profit year, you will have no problem scaling down or eliminating your profit-sharing contribution. Other choices are also possible. This contribution flexibility lets a profitsharing plan fit many business situations.

3 Profit sharing can suit a new company with uncertain profits. Profit sharing can be advantageous for an older, more established business with fluctuating profits. A profitsharing plan can be especially attractive to younger owner-employees who have many years to accumulate plan contributions. A tax-qualified profit-sharing plan offers valuable company and employee tax benefits. All contributions are currently deductible by employers and along with any earnings on the contributions are not taxed to employees until plan funds are distributed to them. Measurable productivity gains are also likely. A plan will give your employees the personal power to affect their rewards through greater profits. When this is made plain to employees, improved performance usually follows. You ll find answers below to frequently asked questions about profit-sharing plans. Q. What is a profit-sharing plan? A. It s a plan that you, the employer, establish and maintain to provide for employee participation (i.e., sharing ) in your company s profits. The usual form of a profit-sharing fund is an employee benefit trust. You generally make your contributions from your profits under a method specified in your plan document. (As suggested above, that method may give you broad flexibility.) Your plan trustee holds and invests the plan contributions until distributions are made. Q. What are the federal tax advantages? A. Employer contributions to a profitsharing plan are eligible for a current tax deduction (subject to tax law limits), even though you intend the contributions to provide employee benefits in the future. Your employees benefit from tax deferral. Plan contributions are not taxable to employees when made. Instead, employees pay no tax on money you contribute until they receive distributions from the plan (usually at retirement). Any income the contributions earn is also tax deferred until distribution. To be eligible for these tax advantages, a profit-sharing plan must satisfy the tax law s qualifying requirements. Q. What are the qualifying requirements? A. They are far too detailed to be fully covered here. Generally, however, a taxqualified profit-sharing plan must: Be established for your employees exclusive benefit

4 Include a definite formula for allocating your contributions among plan participants Meet participation and coverage requirements Provide that a participant s benefits become vested (i.e., nonforfeitable) on one of the schedules based on years of employment that the law allows Not discriminate in favor of highly compensated employees. But plans may be set up for nondiscriminatory classes of employees, such as salaried employees only Meet the pension law s reporting and disclosure requirements Q. Is it complicated to qualify for favorable tax treatment? A. It can be. But we can help you establish a tax-qualified profit-sharing plan, easily and economically. Q. Beyond tax benefits, what are a profit-sharing plan s other advantages? A. A profit-sharing plan allows you to control your benefit costs. If you have no profits in a given year, no contributions are required. (But you may choose to make them anyway.) If there are profits, you can set up your plan so you base contributions on your own assessment of your ability to make them. A profit-sharing plan also gives your employees a stake in profitability and, so, an incentive to increase productivity. In addition, a plan can help you recruit and retain talented employees. Q. What will my contribution limits be? A. To remain tax qualified, in 2008, your plan must not allow annual additions to an employee s plan account that are larger than $46,000 (as adjusted for inflation) or 100% of annual compensation (whichever is less). This nondiscriminatory allocation limit applies to the total contributions you make to all the defined-contribution plans you maintain for your employees. The total plan contribution amount you can deduct each year differs from the individual account limit. You may deduct a contribution of up to 25% of the compensation you pay to your participating employees during the tax year. In addition, the plan may only take into account compensation up to $230,000 per individual participant (to be adjusted for inflation). Q. May participating employees make voluntary contributions? A. That depends on the terms you choose for your plan. Many plans include a

5 401(k) feature that lets participants defer part of their compensation into their profit-sharing accounts on a taxfavored basis. Q. May a tax-qualified profitsharing plan make loans to participants? A. Yes, but to avoid tax, a loan (among other requirements and together with all the participant s other outstanding plan loans) may not exceed the lesser of (1) $50,000 or (2) the greater of $10,000 or half of the participant s vested benefit. Loans must be repaid within five years, unless made to buy the participant s principal residence. The interest rate must be reasonable, the collateral adequate, and the loan available on a nondiscriminatory basis. Q. Is there a specific way that plan contributions must be invested? A. Generally, no. But those responsible for a plan s investment management must meet a prudent person standard, and investments in certain assets may be limited. The investment objectives and plan needs you and your employees identify will determine the types of investments that are right for your plan. We offer several investment alternatives, but before recommending any for your plan, we examine your goals in detail. We know the pension law s investment requirements, and we can help your plan meet those requirements. We also have strong investment experience. So, we can help you set up an investment program to suit your plan s particular investment needs and satisfy the law s requirements. Q. Besides investment skills, what are the other advantages your organization offers? A. We make our IRS-approved plan documents available to you, as well as any amendments needed to reflect changing laws. In addition, we: Execute all investment transactions within your plan s general guidelines Collect all investment income Keep detailed records of all your plan transactions Make distributions as authorized to plan participants Provide all the information you need for tax reporting and participant disclosures As a plan administrator, you will be responsible for: All government reporting on behalf of the plan

6 Making required disclosures to plan participants and beneficiaries Performing all participant recordkeeping Reporting periodically to your participants on their accounts We can help you with the administration of your plan and work with you to ensure that your administration conforms to all pension law guidelines. And our employee benefit specialists are a valuable resource you can call on when you have questions or want to discuss your plan. Employee incentives. Tax benefits. Contribution flexibility. Profit sharing is a winning combination for both you and your employees. We have the experience, preapproved documents, and skills to help you easily establish your plan and administer it smoothly within the guidelines of the pension law. If you want to explore starting a plan for your company or switching over an existing plan, please call us. Copyright 1995, 1996, 1998, 2000, 2001, by NPI 4:4 (3/08)

7 To order this booklet for your clients and prospects, please contact: 15 Corporate Circle Albany, NY Fax Need an order form? Call Newkirk today or download an order form at 4:4