There are a variety of Profit Sharing plans that can be custom-fit to your specific needs. Contributions to a profit-sharing plan are discretionary, you don’t need profits in order to make contributions, and there is no set amount that must be contributed.
If you can afford to make some amount of contributions to the plan, by all means, do so.
- If you do make contributions, you will need to have set a formula for determining how the contributions are divided. This money goes into a separate account for each employee. A participant's retirement benefits are based on that participant’s account balance.
- The money may be invested by a plan sponsor or employee.
Contribution allocations maybe structured in different ways, such as:
- Basic: The same percentage or same dollar amount is allocated to each participant.
- Cross-tested formula: Skewing the benefit in favor of the older, highly compensated employees/owners. Read our cross-tested formula case study to see how this worked for one business.
You may include a 401(k) deferral provision. A Profit Sharing plan can be used in combination with another type of plan, such as a Defined Benefit/Cash Balance Plan, to achieve a higher contribution level.
An employer can contribute up to 25% of the total compensation of all eligible employees. The maximum amount which can be allocated to any one participant is 100% of the participant's compensation or $61,000, whichever is less. The $61,000 limit is adjusted each year to reflect changes in the cost-of-living index.
Advantages to Profit Sharing plans include:
- Contributions are tax-deductible.
- Greater flexibility in contributions – contributions are strictly discretionary.
- Strategically advantageous if you cash flow fluctuates.
- The Profit Sharing plan does not necessarily need to cover all employees.
Disadvantages to Profit Sharing plans include:
- The requirement of filing a Form 5500 annually.
- It may be necessary to test that benefits do not discriminate in favor of highly compensated employees. This testing can get complicated.
Is a Profit Sharing plan right for you?
JC Actuarial Benefit Consultants, Inc. will help you choose the type of plan that will benefit your employees, maximize your tax savings and help your retirement assets reach their fullest potential.