Ch. 3

Traditional Profit-Sharing Plan

A qualified defined contribution plan where employer contributions are flexible and can be discretionary or based on a formula related to profits.

Employer Contribution

In a traditional profit-sharing plan, employer contributions can be made even if there are no profits; they can come from retained earnings or cash flow.

Qualified Plan Requirements

For a profit-sharing plan to remain qualified, contributions must be made on a substantial and recurring basis and in a nondiscriminatory manner.

Contribution Limits (2026)

Annual contributions are limited to the lesser of 100% of employee compensation or $72,000, with only the first $360,000 of compensation considered.

Hardship Withdrawal

A withdrawal allowed for specific immediate and heavy financial needs, with examples including medical expenses, education costs, and foreclosure prevention.

Financial Needs Test

One of the tests that must be met for a hardship withdrawal; it requires the hardship to be due to an immediate and heavy financial need.

Employee Stock Ownership Plan (ESOP)

A type of stock bonus plan that primarily invests participant accounts in employer stock, allowing participants to become owners of the business.

Net Unrealized Appreciation (NUA)

Tax treatment that allows employees to defer taxes on employer stock when distributed in a lump sum, only paying capital gains tax on appreciation upon later sale.

Actual Deferral Percentage (ADP) Test

A nondiscrimination test comparing average deferral rates of highly compensated employees to those of non-highly compensated employees.

SIMPLE 401(k) Plan

A retirement plan for employers with 100 or fewer employees, allowing employee contributions with mandatory employer matching or nonelective contributions.

Roth 401(k) Plan

A provision allowing after-tax contributions to a 401(k) plan, where withdrawals, including earnings, can be tax-free under certain conditions.

Emergency Savings Account (PLESA)

An account linked to retirement plans allowing automatic deferrals for emergency savings, subject to specific contribution caps and withdrawal rules.

Stop-Loss Order

An order to sell a stock when it reaches a specified lower price to limit losses.

Stock Bonus Plan

A type of profit-sharing plan where contributions and benefits are generally made in the form of employer stock, rather than cash.

Contribution Percentage

The percentage of an employee's compensation used to determine maximum annual additions to a retirement plan.

Hardship Withdrawal Qualifications

Conditions under which a hardship withdrawal can occur, including specific financial needs and a lack of other resources to meet those needs.

Nondiscriminatory Contributions

Contributions to employee retirement plans that must be made fairly, ensuring all employees receive reasonable benefits regardless of their status.

Minimum Vesting Rules

Rules that dictate how quickly employees gain ownership of the employer's contributions in defined contribution plans.

Catch-Up Contributions

Additional contributions allowed for older employees (age 50 and above) beyond standard limits in retirement plans.

Leveraged ESOP (LESOP)

A type of ESOP that can borrow money to buy company stock, providing tax advantages and creating a market for shares.