In an extremely competitive business environment, business owners and corporations use profit-sharing plans as a means to motivate employees and increase productivity. Most companies implement profit-sharing plans in the form of a 401k plan.
A profit-sharing plan is used by employers to share a percentage of the company profits with employees. This is income in addition to wages, salaries and medical benefits. Employers can choose how much to contribute to each employee account limited only by contribution limits posed by the IRS.
According to the IRS, for 2010 and 2011, contributions are limited to 25 percent of the employee compensation up to a maximum of $49,000. These limits are subject to cost-of-living adjustments year after year.
Profit-sharing plans serve as an incentive to employees. It increases morale, longevity and worker productivity as employees feel more connected to the enterprise and more valued as an employee.