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Also known as a DPSP, a deferred profit sharing plan is a type of retirement plan in which the contributions of the employer to the plan vary based on the profitability of the business. In most plan structures, the contributions and any interest earned are not subject to taxes until the funds are withdrawn. This type of plan is common in Canada, with the Canadian Revenue Agency providing specific regulations on the annual limits that an employer can contribute, how tax deductions on those contributions can be claimed and when the employee may begin to withdraw funds from the deferred profit sharing plan.
One of the chief benefits for the employee is that no annual contributions that the employer makes into the profit sharing plan are not subject to taxes until the funds are withdrawn. Depending on governmental regulations that apply, it may be possible to roll the proceeds from the plan into a different retirement or investment account at some point and have the withdrawals taxed at a lower rate. Typically, the account receiving the funds from the DPSP must be part of a registered pension plan, which means the governmental revenue agency involved must recognize and approve of that receiving plan in order to qualify for the tax breaks.
Employers also benefit from a deferred profit sharing plan, in that some national revenue agencies provide attractive tax breaks for making the contributions. Depending on the size of the contributions, the deduction can be substantial, and make a considerable difference on the amount of taxes owed by the company during any particular tax period. While most revenue agencies do impose some type of limit on the maximum amount of contributions that an employer can make to each employee’s profit sharing plan, that amount may be increased from one year to the next, depending on the current state of the economy.
Another benefit of a deferred profit sharing plan is that employees tend to be more concerned with the profitability of the employer, since the profits directly impact the amount of the annual contributions made to the plan. In theory, this means that employees are likely to be more productive during their time at work, and also be mindful of using available resources to best advantage. In situations where this holds true, the bottom line is improved as a result of higher production levels and a decrease in supply expenses.
There are some national revenue agencies that allow employees to withdraw funds from a deferred profit sharing plan before actually reaching the age of retirement. Generally, there are specific criteria that must be met, such as financial hardship or reaching a minimum age. The circumstances around the withdrawal will also play a role in how much tax is assessed on the withdrawal.
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