AD Banker Comprehensive Practice Exam

How many consecutive years must contributions be made for a Profit Sharing Plan?

1. 2 out of the last 6

2. 3 out of the last 5

3. 3 out of the last 7

4. 1 out of the last 5

The correct answer is: 3 out of the last 5

A Profit Sharing Plan is a type of retirement plan that allows employers to share profits with their employees, typically in a tax-advantaged way. To meet the requirements for contributions made under this type of plan, the Internal Revenue Service (IRS) stipulates that contributions must be made for at least three out of the last five years. This requirement ensures that the plan remains ongoing and provides a consistent method for participating employees to benefit from the employer's profits over a significant period. The reason the answer indicating three out of the last five years is correct is that it aligns with regulatory guidelines for maintaining the plan's qualified status, which is crucial for both the employer's and employees' tax benefits. This duration allows for a reasonable expectation that the plan is not just a temporary arrangement but a commitment to providing retirement benefits based on the company’s profitability over time. Other potential answers present a different timeframe or number of years, which do not meet the regulatory requirements established by the IRS for Profit Sharing Plans. Therefore, they do not accurately reflect the minimum contribution period that ensures compliance and provides the intended benefits to plan participants.