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Simple English definitions for legal terms
profit-sharing plan
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A quick definition of profit-sharing plan:
A profit-sharing plan is a type of employee benefit plan that allows employees to receive a portion of the company's profits. This means that if the company does well financially, the employees will also benefit. The plan is regulated by a law called ERISA, which ensures that the plan is administered fairly and that contributions are allocated to employees based on a predetermined formula. Contributions are often based on the employee's salary.
A more thorough explanation:
A profit-sharing plan is a type of employee benefit plan that allows employees to share in the profits of the company they work for. This means that if the company does well financially, the employees may receive a portion of the profits as a bonus or additional compensation.
These plans are governed by the Employee Retirement Income Security Act (ERISA) and typically involve discretionary contributions from the employer. The contributions are then allocated to the plan participants based on a predetermined formula, often proportional to each participant's compensation.
For example, if a company has a profit-sharing plan and earns a profit of $1 million, they may decide to allocate 10% of that profit to the plan. If there are 100 employees participating in the plan, each employee would receive $10,000.
Profit-sharing plans are a way for companies to incentivize their employees to work hard and contribute to the company's success. They can also help attract and retain talented employees who value the opportunity to share in the company's profits.