How does a profit-sharing plan typically benefit employees?

How does a profit-sharing plan typically benefit employees?

• A. By providing a salary increase each year
• B. By allowing employees to invest in company stock at a discount
• C. By accumulating funds that are tax-deferred until retirement
• D. By offering a guaranteed payout upon termination

Answer: (C)

A profit-sharing plan benefits employees primarily by accumulating funds that are tax-deferred until retirement. This means that the contributions made to the plan on behalf of the employees are not taxed in the year they are made. Instead, taxes are deferred until the employee withdraws the funds, typically during retirement when they may be in a lower tax bracket. This tax deferral allows the invested money to grow more significantly over time through compound interest, ultimately providing employees with a larger sum when they retire. In contrast, other options do not accurately represent the mechanism or benefits of a profit-sharing plan. For example, a typical profit-sharing plan does not guarantee annual salary increases, nor does it provide stock purchasing at a discount. Additionally, while some plans may offer payouts upon termination, there is no guaranteed payout feature inherent to all profit-sharing plans, making accumulation of tax-deferred funds the primary benefit.

A profit-sharing plan benefits employees primarily by accumulating funds that are tax-deferred until retirement. This means that the contributions made to the plan on behalf of the employees are not taxed in the year they are made. Instead, taxes are deferred until the employee withdraws the funds, typically during retirement when they may be in a lower tax bracket. This tax deferral allows the invested money to grow more significantly over time through compound interest, ultimately providing employees with a larger sum when they retire.

In contrast, other options do not accurately represent the mechanism or benefits of a profit-sharing plan. For example, a typical profit-sharing plan does not guarantee annual salary increases, nor does it provide stock purchasing at a discount. Additionally, while some plans may offer payouts upon termination, there is no guaranteed payout feature inherent to all profit-sharing plans, making accumulation of tax-deferred funds the primary benefit.