Certified Human Resource Professional (CHRP) Practice Exam

Which of the following is true of a deferred profit-sharing plan?

1. Money paid into the plan must vest over 2 years and is paid out on a prorated basis annually.

2. Money paid into the plan is held in a trust and paid out when the employee leaves the organization.

3. Money paid into the plan is taxed for the year in which it is earned.

4. Money paid into the plan includes a combination of immediate cash and future stock based on company profit.

The correct answer is: Money paid into the plan is held in a trust and paid out when the employee leaves the organization.

A deferred profit-sharing plan is designed to share a portion of a company's profits with its employees, typically with the intent of encouraging long-term employment and aligning employee interests with those of the company. The correct statement emphasizes that the money paid into this plan is held in a trust. This is a fundamental aspect of many retirement and profit-sharing plans, as it ensures that the funds are managed in a way that protects the employees' interests until they qualify to receive them, which usually occurs when they leave the organization or meet other specified conditions. This trust arrangement provides security for the employees’ future benefits and ensures proper governance of the funds until they become accessible. In contrast, while some profit-sharing arrangements might feature specific vesting schedules, the common practice for a deferred profit-sharing plan is that the benefits are generally not available until an employee leaves the organization, rather than being prorated annually or immediately available. Additionally, money contributed to such plans is typically not taxed at the point of contribution; instead, taxes are deferred until the employee receives distributions from the plan, making it advantageous from a tax perspective. The mention of a combination of immediate cash and future stock does not typically apply to a standard deferred profit-sharing plan, which focuses more on deferring distribution until