Are You Ready for Profit Sharing?
As competition for skilled workers heats up, profit-sharing plans become increasingly important recruitment and retention tools. But many companies hesitate to set up profit-sharing plans for fear of the cost of upkeep or excessive IRS and Department of Labor (DOL) regulations.
Ed Lentz, secretary/treasurer of Lentz Milling Co., in Reading, Pa., dismisses those worries. "We pay a relatively small sum each year to reap the benefits of a satisfied work force," says Lentz, whose company profit-sharing plan covers about 50 employees. "We basically sign the documents and pay a benefits consultant to monitor all the regulations and rule changes."
To find out if you're ready to commit to a profit-sharing plan for your company, ask yourself these four questions:
* Does management see a need for either a companywide retirement benefit or a tax shelter for owners? Profit-sharing plans can accomplish either objective, thanks to the fair degree of latitude companies have over plan design, particularly as it relates to distribution formulas. Lentz Milling distributes the maximum legally deductible amount to all employees. But the IRS permits plans to discriminate somewhat in favor of highly paid employees, by using "Social Security integration." That basically allows highly paid workers, who are required to make larger Social Security contributions, to be rewarded at higher levels during profit-sharing time.
* Does the business generate enough cash flow to support any type of long-term savings plan for employees? "There's no point considering a profit-sharing plan if the company isn't already able to fund its business operations and growth plans, as well as more essential benefits like health or life insurance," says William Belanger, a benefits consultant at Noble Lowndes. If the company has a record of solid sales growth and positive cash flow, it may be ready.
* Can management tolerate a long-term relationship with a consulting firm? For companies that would do anything to avoid forging another tie to outside professionals, profit-sharing plans won't work. IRS and DOL regulations are so complicated that you're wise to involve benefits consultants or lawyers in plan design and in drafting these key documents: a 40-to 60-page plan document and the IRS Form 5300 (both of which are generally sent to the IRS for review and approval before any plan goes into effect), and a brief summary of the plan (copies of which must be submitted to the DOL, kept on file, and distributed to all plan participants). Expect to pay between $2,500 and $7,500 in setup costs, and another $1,000 or so each year to a consultant who will monitor regulatory changes and prepare employee updates and tax forms.
* Does management prefer a flexible arrangement over a commitment to mandatory annual contributions? Profit-sharing plans permit a high degree of flexibility when it comes to determining how much, if anything, is to be contributed each year by the employer. IRS rules allow no more than, basically, 15% of a company's total payroll to be deducted annually. "We emphasize to employees that there's no obligation at all for us to make any contributions if times get hard," says Lentz. "But we've never cut back from the IRS's maximum level. It's such a great perk for our employees -- and our company's owners." -- Jill Andresky Fraser* * *
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