- This can be a “standalone” plan or part of a 401(k) plan. There can also be a match associated with the 401(k), in addition to the profit sharing.
- A company can make profit sharing contributions without having profits.
- Not for profits can have profit sharing plans although they would be more properly called “incentive compensation,” “flexible contribution” or “discretionary contribution” plans
- Self-employed people, such as proprietors, partners, LLC members, etc. cannot reduce their self-employed income below zero with profit sharing contributions
- Profit sharing contributions would be most appropriately defined as contributions paid by the employer to the account of a participant, that does not relate to the amount of salary deferral contributions, or whether the participants makes salary deferral contributions.
- The simplest profit sharing plans decide on a contribution amount each year. All eligible participants would receive contributions that equal the same percentage of compensation, e.g. 5% of compensation.
- Plans can become much more complex and even decide profit sharing contributions on an individual basis.
- These kinds of profit sharing plans are often referred to as “cross-tested” plans or “new comparability” plans
- These kinds of plans are subject to fairly complex actuarially type testing. If the tests do not pass, then adjustments must be made in the allocation of contributions
- This technique is often used to provide large contributions to owners and executives of a company, while controlling the costs for other employees
- A company must have certain demographics for this technique to work well.
- The same comments concerning the “last day of the year” rule that apply for matching contributions (above section), also apply to profit sharing contributions
- If a plan is top heavy (see above) it will usually require a company paid profit sharing contribution of 3% of compensation for each non-key participant
- Profit sharing contributions can be as large as $50,000 either alone, or along with 401k) and matching contributions. A profit sharing contribution cannot exceed a participant’s compensation. For example, if a participant has $30,000 of salary, then $30,000 would be the largest profit sharing allocation
- Deduction limitations may reduce the maximum amount. The total of all profit sharing and matching contributions cannot exceed 25% of the aggregate compensation of all eligible participants.
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