Deferred Contribution Plan§
A Deferred Contribution Plan refers to an arrangement in which an unused deduction or credit carryover to a profit-sharing plan can be added to an employer’s future contributions on a tax-deductible basis. This occurs when the employer’s contribution to the profit-sharing plan is less than the annual 15% of employee compensation allowed by the Federal Tax Code.
Examples§
- TechCorp Inc. contributes 10% of employee compensation to the company’s profit-sharing plan this year. The unused 5% (since the maximum is 15%) can be carried over to the next year, allowing TechCorp Inc. to deduct it from the next year’s taxable income upon contribution.
- RetailCo LLC contributed only 8% of employee compensation to its profit-sharing plan this fiscal year. The 7% remaining unused deduction can be utilized as a tax-deductible part of their contributions the following year.
Frequently Asked Questions (FAQs)§
Q1: What is the benefit of a Deferred Contribution Plan for employers?§
A: The primary benefit for employers is the ability to maximize tax deductions by carrying over unused deductions. This leads to potential tax savings in future years.
Q2: How does a Deferred Contribution Plan affect employee benefits?§
A: The deferred contributions enhance the future value of the employees’ retirement benefits since accumulated contributions can grow tax-free until distribution.
Q3: Are there limits to how long unused deductions can be carried forward?§
A: Yes, the carryover period and any specific conditions are subject to IRS regulations, which may vary.
Q4: Can an employer choose to use or not use the carryover?§
A: Yes, employers can choose whether or not to utilize the carryover based on their financial strategies and goals.
Related Terms§
- Profit-sharing Plan: A retirement plan where an employer shares a portion of its profits with employees, contributing to their retirement accounts.
- 401(k) Plan: A qualified retirement plan allowing employees to save and invest a portion of their paycheck before taxes are taken out.
- Tax-deductible Contribution: Contributions that are deducted from an individual’s or organization’s taxable income.
- Credit Carryover: An unused tax credit that may be carried over to subsequent years.
- Federal Tax Code: The body of law governing federal taxation in the United States.
Online References§
- IRS Guidelines on Deferred Contribution Plans
- Investopedia’s Overview of Deferred Contribution Plans
- Department of Labor - Profit-sharing Plans
Suggested Books for Further Studies§
- “The 401(k) Owner’s Manual” by George Huss
- “Profit Sharing: Does It Make A Difference? The Productivity and Stability Effects of Employee Profit Sharing Plans” by Douglas Kruse
- “Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches” by Allen Reuther
Fundamentals of Deferred Contribution Plan: Business Law Basics Quiz§
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