Does Profit Sharing Affect Unemployment Benefits?

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The benefits provided by unemployment insurance are affected by payments from other income sources at the time an individual is without a job. This raises an important issue with regard to individuals who enjoyed participation in a company's profit-sharing program prior to being laid off. Payments from a profit-sharing plan received while unemployed may or may not affect unemployment benefits depending on the manner in which the individual opted to receive his profit share.

Unemployment Insurance

Companies carry unemployment insurance to ensure that employees receive legal and just compensation in the event that their employment is terminated for reasons beyond their control. Unemployment insurance is a government-managed social program into which employees contribute as part of their payroll deductions. Termination of employment activates the insurance benefits, which provide payments that support an individual for a specific length of time or until she finds another job.

Profit Sharing

In profit sharing, a company allocates a designated portion of its earnings among its employees on a quarterly or semiannual basis. Companies engage in profit sharing as way to motivate their employees. It's based on the premise that earnest, quality work generates higher company earnings from which employees later benefit. Employees may have the option of receiving profit-share payments as either paycheck bonuses or as contributions toward a tax-deferred annuity or retirement account.

Receipt of Profit Share as an Annuity or Pension

If a company employee chose to deposit his profit-share payments into a tax-deferred retirement or annuity account prior to having been laid off, the money would be inaccessible unless he wishes to make a premature withdrawal comprising heavy penalties. For this reason, the payment isn't considered expendable income and doesn't affect his eligibility to receive unemployment benefits.

Receipt of Profit Share as Cash

If a company employee opted to receive her profit-share payment as part of her payroll wages in advance of being laid off, the money is considered a form of taxable income. The former employee's receipt of her profit-share payment jeopardizes her unemployment benefits. The reason is that her profit share for the accounting period during which she was laid off is not paid by the company until the beginning of the next period. Consequently, in receiving her final profit-share payment, the former employee forfeits the unemployment benefits she receives at this time.

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