Profit Sharing Plans
Profit Sharing: Gives the maximum flexibility in employer contribution. A profit sharing plan allows an employer (at the employers’ discretion) to contribute and deduct from 0% to 25% of covered payroll each year.
There are basically 3 types of Profit Sharing plans, each has its own goal and useful set of sometimes motivational tools. All are designed to motivate and retain quality employees who can help generate income or profits to the bottom line.
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Types of Profit Sharing Plans
There are three primary types of profit sharing plans: the pro-rata plan (the most common), new comparability plans (the most flexible), and age-weighted plans (most helpful for retaining talent). By thinking about profit sharing contributions in terms of employee age, importance to your company, and your business goals, you can choose the one that will work best for your business. Here are the details of each:
A pro-rata plan:
A pro-rata plan is one where everybody in the plan receives employer contributions at the same rate. It works similarly to an employer match, in that every employee receives a percentage—in this case, the same percentage for each employee—of their compensation as an employer contribution. For employers who want simplicity, but are interested in adding an additional benefit, this is a great choice.
New comparability 401(k) profit sharing:
New comparability profit sharing (sometimes called “cross-testing”) offers the most flexibility for owners who want to personally receive the maximum possible contribution, or who want to be able to make contributions to employees at different rates. By placing employees into separate benefit groups, owners can get the maximum percentage contribution while other employees get a smaller amount. Generally speaking, cross-testing works best with older owners and a younger employee base.
Age-weighted profit sharing plans:
Age-weighted profit sharing plans feature contributions that correspond to equivalent benefits at retirement age. In other words, the older an employee is, the higher percentage contribution they’ll receive. This is a good option for employers primarily concerned with retaining talent; the longer someone stays with the company, the more their employer contribution rate will increase.
Please let one of our qualified team members help you see which profit sharing plan will be suitable given your goals and wants with a no cost consultation.
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