Which qualified plans allocate a portion of a company's profits to employee retirement accounts?

Which qualified plans allocate a portion of a company's profits to employee retirement accounts?

• A. IRA
• B. profit sharing plans
• C. 401k
• D. 403B

Answer: (B)

Allocating a portion of company profits to employee retirement accounts is a hallmark of profit-sharing plans. In this qualified plan, the employer contributes to employees’ accounts, with the amount typically tied to the company’s profitability and may vary year to year. This direct link between profits and contributions distinguishes it from other plans. IRAs are funded by individuals, not by employer profits. 401(k) and 403(b) plans are primarily defined as employee-deferral plans (with potential employer contributions), but their core feature is pre-tax salary deferrals rather than allocating a share of profits; profit sharing can be part of them, but the defining mechanism of profit-based contributions belongs to profit-sharing plans.

Allocating a portion of company profits to employee retirement accounts is a hallmark of profit-sharing plans. In this qualified plan, the employer contributes to employees’ accounts, with the amount typically tied to the company’s profitability and may vary year to year. This direct link between profits and contributions distinguishes it from other plans.

IRAs are funded by individuals, not by employer profits. 401(k) and 403(b) plans are primarily defined as employee-deferral plans (with potential employer contributions), but their core feature is pre-tax salary deferrals rather than allocating a share of profits; profit sharing can be part of them, but the defining mechanism of profit-based contributions belongs to profit-sharing plans.