Profit Sharing Plan (PSP) is a type of retirement plan where a portion of an organization's profits are set aside and allocated to its employees. These plans are usually set up as a type of defined contribution plan, where the employee's benefit is determined by the amount of money contributed to their account, along with investment gains or losses.
In a PSP, the employer determines the amount of profits that will be allocated to the plan and contributes to the employees' accounts on a discretionary basis. The contribution is typically a percentage of the company's profits, and the amount contributed can vary from year to year depending on the financial performance of the organization.
Participation in a PSP is typically limited to certain groups of employees, such as executives or highly compensated workers. The funds in a PSP are invested, and the employees' accounts grow over time. Upon retirement, employees can receive the balance in their account as a lump sum or as an annuity.
It's important to note that PSPs are subject to certain legal requirements, such as funding and vesting rules, and are regulated by the Employee Retirement Income Security Act of 1974 (ERISA). Additionally, PSP contributions are generally tax-deductible for the employer and taxed as ordinary income to the employee when received.