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Qualified Plans -
Profit Sharing Plan |
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Profit Sharing Plan
A Profit Sharing Plan is a retirement plan in which the contributions are made solely by the employer. The business owner has the flexibility to contribute and deduct between 0% and 25% of eligible participant's compensation up to a maximum each year. Several allocation methods are available:
- Same percentage of compensation for each participant
- Permitted disparity (Social Security Integration)
- Age-weighted
Plan Eligibility
- Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, can establish a profit sharing plan.
- All elibible employees must be allowed to participate in the plan. An eligible employee is any employee who has provided service to the employer for up to two years.
- Union employees and non-resident aliens who have no U.S. source of income may generally be excluded from coverage.
- If the elected waiting period is 1 year or longer, the employee must normally work 1,000 hours during the 12-month period beginning on the date of employment and satisfy the plan's service requirement in order to enter the plan.
- If the waiting period is less than 1 year, all employees must be included after satisfying the eligibility requirements regardless of the number of hours worked during the year.
- The employee's minimum age is elective, but cannot exceed age 21. Note: an employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.
Vesting
Vesting is the participant's ownership in the value of his/her retirement account or benefit. The vesting schedule elected by the employer applies to all participants.
- If the service requirement is 1 year or less, a graded vesting schedule may be elected. The most common graded schedule is 0% the first year and 20% per year thereafter.
- If the service requirement is greater than 1 year, vesting must be 100% immediately upon becoming a participant in the plan.
Tax Advantages
- Employer contributions are tax deductible for the employer - up to the lesser of 25% of the total participant's compensation
- Tax-deferred growth potential is possible - any investment earnings grow tax-deferred until withdrawn
Plan Deadline
The deadline to establish a profit sharing plan is the last day of the fiscal year of the business. For calendar year businesses, this deadline is December 31st.
Contribution Flexibility
No annual contribution is required
- Contribution percentage can vary each year, from 0-25% of compensation, up to a dollar maximum per participant each year.
- Individual limits: the allocation of contributions to a participant's account may not exceed the lesser of 100% of includable compensation or $42,000 per year.
- Contribution base: contributions are normally based on total compensation (base salary, bonuses, overtime, etc.) The maximum compensation recognized in 2005 is $210,000.
Features will vary by company and product. Please refer to
Glossary for definitions
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