Which type of profit-sharing plan allows employees to defer tax on their earnings until retirement?

The correct answer revolves around the concept of tax deferral, which is a significant feature of certain profit-sharing plans. A deferred profit-sharing plan allows employees to set aside a portion of their earnings that won't be taxed until they withdraw the funds, typically at retirement. This arrangement not only provides immediate tax benefits by reducing taxable income in the current year, but also allows the invested funds to grow tax-deferred, which can lead to a larger retirement nest egg.

Other options do not fit this definition. A cash plan involves immediate payout of profit-sharing bonuses, which means employees are taxed at the time of the payout. The Scanlon Plan is a specific type of gain-sharing plan that ties employee bonuses to productivity improvements and efficiency gains, without necessarily involving tax deferral. A piece-rate incentive rewards employees based on the number of units they produce, with each piece of work having a set monetary value, and such earnings are also taxed when paid.

Understanding the benefits and structures of different profit-sharing plans can help employees and organizations alike in formulating effective compensation strategies that align with long-term financial planning and reward systems.