Profit Sharing Plans

 

Advantages of having a Profit Sharing Plan:

All contributions to a profit sharing plan are made by the employer and are discretionary.  Unlike a defined benefit plan or a money-purchase pension plan there is no set contribution that must be made.  If, as business owner, you can afford to make some amount of contributions to the plan, then you are free to do so. Profit Sharing Plans also allow for high contribution limits. In 2011 the contribution limit is the lesser of 25% of compensation or $49,000 per person in the plan.

 

Who adopts a Profit Sharing Plan?

Companies that want greater flexibility in contributions will adopt a profit sharing plan over a defined benefit plan. Contributions to a profit sharing plan are made by the employer only and are discretionary. This is an especially good plan if cash flow is an issue. All 401(k) plans are profit sharing plans. Companies that want to adopt a 401(k) plan technically want a profit sharing plan with a 401(k) arrangement. The 401(k) arrangement allows employees to contribute to the plan by salary reduction.

 

Highlights:

If you do make contributions, you will need to have a set formula for determining how the contributions are divided.  There are basically three methods of determining each participant’s allocation in a profit sharing plan.

• Same percentage of compensation for each participant also known as the "comp-to-comp" method

• Permitted disparity (Social Security Integration)

• Age-weighted

If you establish a profit-sharing plan, you:

• Can have other retirement plans.

• Can be a business of any size.

• Need to annually file a Form 5500.

 

As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you want to.  Pre-approved profit-sharing plans are available to cut down on administrative headaches.

 

Who Contributes:  Employer contributions only.

 

Contribution Limits:  In 2011 the contribution limit is the lesser of 25% of compensation or $49,000.

 

Filing Requirements:  Annual filing of Form 5500 is required.

 

Compliance Testing: Plan subject to annual non-discrimination testing.

 

Participant Loans:  Permitted.

 

In-Service Withdrawals:  Yes, but subject to possible 10% penalty if under age 59-1/2.