A profit-sharing plan is a qualified employer sponsored plan in which an employer has the discretion to determine the date and amount of company contributions into the plan. The amount allocated to each individual account is usually based on the salary level of the participant.

An employer’s contributions to participants’ accounts, and any investment earnings, accumulate on a tax-deferred basis. The IRS will tax these benefits as part of the employee’s regular income only when the assets are distributed from the plan, typically after a participant retires or terminates employment. Whether withdrawals are made during a participant’s employment or while still employed, depends on the terms of the plan document. Some plans permit withdrawals after attainment of age 59 ½, or after some specified period of participation (usually at least five years). Beware that distributions prior to age 59 ½ are subject to a 10 percent penalty tax unless exceptions apply.

Each plan has a trustee who is generally responsible for managing the plan assets and for ensuring that various financial and tax documents are prepared. Other administrative duties are overseen by a plan administrator, who will frequently hire a third-party administrator to perform most administrative functions such as preparing the annual tax return and plan document.