Profit Sharing Plans

 

Profit sharing plans allow the employer to make discretionary profit sharing contributions to the plan on behalf of participants. Employers can contribute up to 25% of eligible compensation, and contributions may be based on company profits but can also be made on any other basis. The amounts are allocated, or divided among participant accounts, based on a formula provided for under the plan document. Common allocation methods include:

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• Prorata  - straight percentage of eligible plan compensation

• Integrated - allocates a slightly higher percentage to participants with eligible compensation in excess of a certain dollar amount (tied to the social security wage base)

• Cross-tested – allocates different contribution levels to specific groups of participants and is often used when the goal is to maximize contributions for owners

 

Profit sharing plans can include a variety of features such as vesting of participant account balances, participant loans, participant direction of investments, daily valuation, and in-service distributions. Profit sharing plans can also include a 401(k) deferral provision.