United States Individual Tax Site: Profit Sharing Plans and Eligible Individual Account Plans (EIAP)

Introduction A summary of the range of schemes available in the US.

Employee Stock Option Plans There are numerous advantages for employees, companies, and existing shareholders when implementing an ESOP.

Profit Sharing Plans And Eligible Individual Account Plans (EIAP) An EIAP is a form of profit sharing plan which can be designed to permit up to 100% of trust assets to be invested in employer securities.

401(K) Plans A 401(k) plan permits employees to choose to defer a portion of their wages on a pre-tax basis.

Broad Stock Options: Incentive Options With an incentive stock option, a company grants the employee an option to purchase stock at some time in the future at a specified price.

Employee Stock Purchase Plans The purchase plan option gives employees an opportunity to share in the growth potential of the company's stock.

Unqualified Broad Stock Options The purchase plan option gives employees an opportunity to share in the growth potential of the company's stock.

Recent Legislative Developments The Treasury's rulings from 2004 to 2009, and legislative efforts in Congress.

Profit Sharing Plans And Eligible Individual Account Plans (EIAP)

A profit sharing plan is another type of qualified retirement plan that may be adapted to invest in employer securities. Contributions to a profit sharing plan are generally determined by applying a contribution formula contained in the plan to employer profits or employee compensation levels. The level of employer contributions, however, may be made variable and left to the annual discretion of the plan sponsor. Contributions need not be made every year, but as a prerequisite to tax qualification, contributions to a profit sharing plan must be recurring and substantial. Section 401(a)(27) of the Code provides that the determination of whether a plan is a profit sharing plan must be made without regard to the current or accumulated profits of the employer and without regard to whether the employer is tax exempt.

An EIAP is a form of profit sharing plan which can be designed to permit up to 100% of trust assets to be invested in employer securities and is similar in many respects to an ESOP. ERISA normally permits only 10% of plan assets to be invested in employer securities. The cost of creating an EIAP is very low when compared to that of creating an ESOP, particularly if the employer already maintains a profit sharing plan.

Lowtax Jurisdictions