Which statement about profit-sharing plans is correct?

Prepare for the Nebraska Life and Health License Exam with our interactive quiz. Use flashcards and multiple choice questions for thorough exam readiness. Access hints and explanations for every question!

Profit-sharing plans are a type of defined contribution plan designed to give employees a share in the company's profits. The correct statement relates to contribution limits, which are set in accordance with regulations for defined contribution plans. Under current IRS guidelines, these contribution limits are capped annually and apply uniformly to all defined contribution plans, which includes profit-sharing plans.

This means that companies can contribute to employee profit-sharing plans as long as they adhere to the set contribution limits, which allow for a combination of employer contributions and employee deferrals, but not exceeding the specified annual maximum. This framework is designed to ensure that contributions made to retirement plans are equitable and sustainable for both employers and employees.

The other options provide incorrect information about the nature and requirements of profit-sharing plans, such as implying they have no contribution limits, equating them to defined benefit plans in terms of limits, or suggesting that they are mandatory for all employees. Each of these inaccuracies reveals a misunderstanding of how profit-sharing plans are structured and regulated under U.S. retirement plan laws.

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