Deferred profit sharing plans are non-contributory since the contributions are made by the employer only. Therefore, the employees do not make any contributions. True or False
The correct answer and explanation is :
The statement is True.
A Deferred Profit Sharing Plan (DPSP) is a type of employer-sponsored retirement plan in which the employer makes contributions to the plan on behalf of employees. The contributions are usually based on the employer’s profits, and these contributions are then deferred to be used by the employee upon retirement, typically through a lump sum or as annuity payments.
In a non-contributory plan, the employee does not contribute any funds towards the plan. This differentiates it from contributory plans, where employees are required to make their own contributions, sometimes alongside employer contributions. In the case of a DPSP, the contributions come entirely from the employer, meaning the employee’s role is limited to receiving the benefits of the employer’s contributions.
Key Features of Deferred Profit Sharing Plans:
- Employer Contributions Only: DPSPs are generally non-contributory because only the employer makes contributions. These contributions are often a percentage of the company’s profits, though the amount and frequency can vary.
- Deferred Benefits: The funds contributed by the employer to a DPSP are typically invested and not accessible by the employee until they retire, hence the term “deferred.” This delay in access allows the funds to grow through investments over time.
- Employee Benefits: Employees benefit from the contributions made by the employer without having to contribute any money themselves. However, they typically cannot control the amount of contributions or how they are invested within the plan.
- Tax Deferral: Similar to other retirement plans, contributions made to DPSPs are tax-deferred, meaning employees do not pay taxes on the contributions or their growth until they withdraw the funds, usually after retirement.
Thus, in a Deferred Profit Sharing Plan, contributions are exclusively made by the employer, confirming that it is a non-contributory plan from the employee’s perspective.