What is the primary purpose of a Deferred Profit Sharing Plan (DPSP)?

A Deferred Profit Sharing Plan (DPSP) is primarily designed to share a portion of company profits with employees in a tax-deferred manner. This means that the contributions made by the employer, which represent a share of the profits, are not subject to immediate taxation for the employees. Instead, taxes on these contributions are deferred until the employee withdraws the funds, typically at retirement. This characteristic of a DPSP allows employees to benefit from potential investment growth over time without being taxed on those earnings until they access the funds.

The other choices represent concepts that are not aligned with the fundamental purpose of a DPSP. Guaranteeing retirement income focuses on the security of guaranteed payouts, whereas a DPSP’s value is contingent on the company’s profitability. Immediate cash benefits upon retirement suggest a payout structure that is not applicable to DPSPs, as these plans generally involve a waiting period until the employee retires or withdraws the funds. Lastly, ensuring total coverage for medical expenses is unrelated to the structure of a DPSP, which does not encompass medical coverage but rather focuses on profit-sharing as a component of retirement savings.