Profit Sharing Plans

Profit Sharing Plans

A Profit Sharing plan is usually the most flexible and cost-effective plan option available to a small employer. Company contributions are at the discretion of the employer, and are not required in any particular year. There are no employee contributions allowed

The annual employer contribution can be allocated amongst eligible participants based on the client’s objectives:

  • Basic (Pro-Rata) Employer Formula

    Each participant receives the same percentage of compensation as an employer contribution (up to the allowable IRS limits)

  • Integrated with Social Security

    This allows a slight skewing of contributions in favor of employees making more than the Social Security wage base.

  • Tiered Employer Formula

    Participants are split into different category tiers (example: Owners and Others) and provides a maximum percentage of compensation to the owner for as little as 5% of compensation to all others. This formula is subject to age-based discrimination testing which benefits older owners.

Company contributions to a Profit Sharing Plan are limited to 25% of the total participants covered compensation annually. If an employer would prefer to make contributions in excess of 25% of covered compensation, or would prefer to make contributions for a targeted employee (i.e. the owner(s)) in excess of the individual maximum contribution limit of $66,000 (2023 limit), indexed annually), a Defined Benefit Plan or Cash Balance Plan should be considered.

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