A profit sharing plan is a type of defined contribution plan. Through a profit sharing plan, employees can share in the employer’s profits. The plan must contain a formula for allocating contributions to the participants, but the employer has the discretion as to how much they contribute to the plan each year.
Profit Sharing Design Alternatives:
- 401(k)
A 401(k) plan is a defined contribution savings plan that allows you to contribute a portion of your salary to a retirement plan account. You can reduce your current taxable income and pay less in taxes immediately because your employer deducts the contributions before taxes. In addition, your investments grow tax deferred until you take your money from the account, which is usually at retirement. If you withdraw your money before age 59½, you may be subject to a 10% Federal tax penalty.
- Safe Harbor Plans
A safe harbor plan is a 401(k) plan that is deemed to pass the nondiscrimination tests by following one of two formulas:
1. Give the plan participants a 100% vested, 3% of compensation profit sharing contribution, regardless of whether or not they are deferring, or:
2. Match the deferring participants at a 100% vested, 100% of the first 3% deferred plus 50% of the next 2% deferred contribution
In addition, there are withdrawal restrictions and annual notice requirements that must be followed with a safe harbor plan.
- Age Weighted
In this type of plan, contributions are allocated based on age and compensation. Actuarial factors that take into account each participant’s age and compensation are used to determine the number of points assigned to each participant. The contribution is then allocated pro rata based on points.
- New Comparability
A new comparability plan is a type of profit sharing plan in which the employer contributions are allocated to the participant using a formula which passes the nondiscrimination tests with regard to the amount of contribution\benefit using the cross tested method. |