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What are profit-sharing plans or stock bonus plans? |
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From : U.S. Department of Labor
Personal Finance >
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A profit-sharing or stock bonus plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan or stock bonus plan may include a 401(k) plan.
What are 401(k) plans?
Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan. You can elect to defer receiving a portion of your salary which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes the employer may match your contributions.
There are special rules governing the operation of a 401(k) plan. For example, there is a dollar limit on the amount you may elect to defer each year. The dollar limit is $12,000 in 2003 with annual increases in $1,000 increments until the limit reaches $15,000 in 2006. Other limits may apply to the amount that may be contributed on your behalf. For example, if you are highly compensated, you may be limited depending on the extent to which rank-and-file employees participate in the plan. Your employer must advise you of any limits that may apply to you.
As with other types of retirement plans, a 401(k) can permit catch-up provisions for employees age 50 and over. The catch-up amount in 2003 is $2,000 and increases in $1,000 increments until the limit reaches $5,000 in 2006.
Although a 401(k) plan is a retirement plan, you may be permitted access to funds in the plan before retirement. For example, if you are an active employee, your plan may allow you to borrow from the plan. Also, your plan may permit you to make a withdrawal on account of hardship, generally from the funds you contributed. The sponsor may want to encourage participation in the plan, but it cannot make your elective deferrals a condition for the receipt of other benefits, except for matching contributions. |
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