Eligibility
Corporations (S & C type), self-employed individuals, partnerships and non-profit organizations can establish a Profit Sharing Plan. The plan must be established by the last day of the employer's fiscal year, although funding may be deferred until the employer's tax-filing deadline, including filed-for extensions.

Most qualified plans utilized a Master or prototype plan approved by the IRS. These documents are normally provided by the named Custodian, such as Trust, banks, trade or professional organizations, insurance companies and mutual funds, of the plan. Under a Master Plan, a single trust or custodial account is created, for the use of all employers. Under a prototype plan, a separate trust or a custodial account is established for each employer. Trust Administration Services offers both Profit Sharing and Money Purchase Pension plan prototype documents.

An employer may wish to restrict plan eligibility in order to reward those employees with longer tenure. This is permissible within certain limits. The plan may exclude employees who have not attained age 21 and those with less than two years of service (a year of service is generally defined as 1,000 hours within the plan year). It is more common to establish a one year service requirement which allows a vesting schedule to be applied to contributions, because employees restricted from participating in the plan for more than a year become 100% vested upon entry into the plan.

The plan may also exclude non-resident aliens and employees covered under a collective bargaining agreement, as well as entire subsidiaries, divisions, or classifications of employees as long as the plan covers a certain minimum percentage of all non-highly compensated employees.

Contributions
With a Profit Sharing Plan, the company’s contributions are discretionary and are based solely on each participant’s compensation. The employer determines the contribution percentage they would like to make for any given year. As an example, if the business owner decides to make a 15% contribution, he/she needs to make a contribution of 15% to each eligible employee. This obligation to fund the plan makes a Profit Sharing Plan different from most Money Purchase Pension Plans.  In a Profit Sharing Plan, there are generally no unfavorable consequences for the company if it fails to make a contribution.  However, if the company maintains a Money Purchase Pension Plan, its failure to make a contribution can result in the imposition of a penalty tax.  With the increase in the primary limitation on tax-deductible contributions to a Profit Sharing Plan from 15% to 25% of total compensation, there appears to be little reason for an employer to adopt or continue to maintain a Money Purchase Pension Plan. Notwithstanding, TRUST sponsors a prototype plan document for companies who still want to maintain this type of retirement plan.

Contribution Limits:  The lesser of 25% of compensation* or $45,000 in 2007, subject to cost-of-living adjustments for later years.

*The maximum compensation that may be used is $225,000 (2007).

Contributions are considered made if you make them by the due date of your tax return, the plan was established by the end of the year, and the plan treats the contribution as if it was received on the last day of last year. In addition, the trustee must advise the custodian and/or the plan administrator the year for which the contribution applies.

Distribution
An amount paid to participants from a qualified plan is called a distribution. Distributions may be periodic (scheduled withdrawals), non-periodic or lump sum. If the account balance is to be distributed, the plan administrator must figure the minimum amount required to be distributed each calendar year. This is figured by dividing the account balance by the appropriate life expectancy. The required distribution date from a qualified plan is the calendar year in which he or she reaches 70 1/2 or the year he or she retires with the employer maintaining the plan.

An employee must experience a "qualifying event" to gain access to his/her Profit Sharing Plan account assets. Distributions can only be made in the following circumstances:

See IRS Publication 575 for more information.

Tax Treatment of Distributions
All distributions will be taxable as income to the recipient, except for distributions attributable to after-tax contributions or qualified rollover amounts. Generally, distributions prior to age 59 1/2 are subject to a 10% early withdrawal penalty, in addition to income taxes, unless the following circumstances prevail:

Qualified rollover amounts . If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or a Traditional IRA. You do not include the amount rolled over in your income until you receive it in a distribution from the recipient plan or IRA without rolling over that distribution. A qualified rollover is not any of the following:

If a participant is expected to receive $200 or more from a plan, the payer must withhold 20% for federal income tax. If the participant chooses instead to have the plan pay it to an IRA or another eligible plan, no withholding is required. If no income tax is withheld and no rollover occurs, the recipient may have to make estimated tax payments. To report the tax on early distributions, file Form 5329.

For more information, consult your tax advisor or the Department of Treasury, Internal Revenue Service Publication 560 Retirement Plans For Small Businesses listed under Publications.