What defines a profit-sharing plan?

A profit-sharing plan is defined by the contributions made by the employer, which are based on the company's profits. This means that the amount contributed to the retirement plan can vary each year depending on the profitability of the business. It is designed to incentivize employees by allowing them to share in the company's success, aligning their interests with those of the business.

The distinguishing feature of profit-sharing plans is the potential for variable contributions, which may change from year to year in line with the company's financial performance. Because the employer has the discretion to determine the contribution amount based on profits, employees benefit directly from the financial success of the organization. This creates a dynamic and motivating environment for employees to work towards enhancing company performance.

In contrast, other options do not appropriately capture the essence of a profit-sharing plan. Employee voluntary contributions do not define this type of plan, as profit-sharing primarily involves discretionary employer contributions. Contributions solely based on employee tenure do not reflect the profit-driven aspect that characterizes profit-sharing. Lastly, a profit-sharing plan does not involve fixed contributions; this characteristic applies more to defined contribution plans like 401(k)s where contributions might be predetermined.