A profit-sharing agreement used to be supplemental to a type of pension called a defined contribution plan.
[citation needed] The simplest and most common profit sharing implementation is for the employer to contribute a flat dollar amount that is allocated based on a percentage of the employees' annual compensation.
Currently, the total amount contributed to the plan cannot exceed the lesser of: The Treasury regulations to the Internal Revenue Code sets out the requirements for a profit-sharing agreement.
Then the agreement must set out whether allocations may begin after a fixed number of years, attainment of certain age or prior occurrence of some event.
[3] This phantom profit originates from a predetermined formula for allocations under the profit-sharing agreement.