Profit Sharing Plan

A Profit Sharing Plan is a retirement plan in which the contributions are made solely by the employer. The business owner has the flexibility to contribute and deduct between 0% and 25% of eligible participant's compensation up to a maximum each year. Several allocation methods are available:

• Same percentage of compensation for each participant
• Permitted Disparity (Social Security Integration)
• Age-Weighted

Plan Eligibility

• Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, can establish a Profit Sharing plan.
• All eligible employees must be allowed to participate in the Profit Sharing Plan. An eligible employee is any employee who:
  • has provided service to the employer for up to 2 years
• Union employees and non-resident aliens who have no U.S source of income may generally be excluded from coverage.
• If the elected waiting period is 1 year or longer, the employee must normally work 1,000 hours during the 12-month period beginning on the date of employment and satisfy the plan's service requirement in order to enter the plan.
• If the waiting period is less than 1 year, all employees must be included after satisfying the eligibility requirements regardless of the number of hours worked during the year.
• The employee's minimum age is elective but cannot exceed age 21.
  
  Note: An employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.

Vesting

Vesting is the participant's ownership in the value of his/her retirement account or benefit. The vesting schedule elected by the employer applies to all participants.

• If the service requirement is 1 year or less, a graded vesting schedule may be elected. The most common graded schedule is 0% the first year and 20% per year thereafter.
• If the service requirement is greater than 1 year, vesting must be 100% immediately upon becoming a participant in the plan.

Tax Advantages

• Employer contributions are tax deductible for the employer -- up to the lesser of 25% of the total participant's compensation.
• Tax-deferred growth potential is possible -- any investment earnings grow tax-deferred until withdrawn.

Plan Deadline

The deadline to establish a Profit Sharing Plan is the last day of the fiscal year of the business. For calendar year businesses, this deadline is December 31st.

Contribution Flexibility

No annual contribution is required

• Contribution percentage can vary each year, from 0-25% of compensation, up to a dollar maximum per participant each year.

Investment Options

• Annuities*
• Life Insurance
• State Farm Mutual Funds®
• State Farm Bank® Fixed Rate CD

Key Advantages

• Contributions may vary from year to year
• Gradual vesting of employee balances available

Attractive benefits for employees

• Offering a Profit Sharing Plan can make it easier to attract and retain valuable employees.
• A Profit Sharing Plan can assist in providing retirement income for eligible employees.

Early Withdrawal Penalty

Generally, a 10% tax penalty is applicable to distributions for participants under age 59 1/2. Participants may have to pay Federal Income Tax on the distributions, as well.

Reporting and Disclosure Requirements

• Reporting to the IRS - Form 5500 (Annual Return/Report of Employee Benefit Plan) and applicable schedules must be filed with the IRS each year.
• Disclosure to Plan Participants and Beneficiaries -- each plan participant or beneficiary can request an easily understandable summary plan description within 90 days after they become eligible and a summary annual report each year within 7 months after the end of each plan year.

For detailed information on qualified retirement plans, please contact your State Farm agent.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 269 KB) .

It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

AP2007/12/9647