What a profit sharing plan is.

A profit sharing plan is a defined contribution plan to which the employer agrees to make "substantial and recurring" contributions although generally discretionary. Amounts contributed to the plan are invested and accumulate tax deferred for eventual distribution to participants or their beneficiaries either at retirement, after a fixed number of years, or upon the occurrence of some specified event, e.g., disability, death, or termination of employment.

A profit sharing plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants, e.g., the allocation of an employer contribution among participant accounts in proportion to the compensation of each participant. Although many profit sharing plans adopt a discretionary contribution formula, others adopt a fixed formula. For example, an employer may obligate itself to contribute to its profit sharing plan a specified percentage of each participant's compensation if profits exceed a specified level.

As with other defined contribution plans, retirement benefits in profit sharing plans are based on the amount in the participant's account at retirement. Unlike defined benefit plans, forfeitures in profit sharing plans arising from participant turnover may be reallocated among remaining participants.