Profit Sharing Plans
A profit sharing plan is a flexible and popular retirement plan. A profit sharing plan with a vesting schedule rewards long-term employees and enhances employee satisfaction. Any type of entity may sponsor a profit sharing plan including: Corporations, Sole Proprietorships, LLCs, Partnerships and Non-Profit organizations.
One of the most advantageous features is that the annual contribution is entirely discretionary.
There are 4 design options available:
- Pro-rata: same percent to all eligible employees
- Integrated: higher wage earners receive higher percent of pay
- Age-based: higher wage earners/ older employees receive higher contribution
- Cross tested: groups of employees can receive different contributions
Profit Sharing Limits |
2020 |
Employer Contribution | 25% of eligible payroll |
Individual Limit |
$57,000 |
Eligibility can range from immediate to maximum of 2 years of service (with immediate vesting) and age 21. The employer may require 1,000 hours of service.
The plan must be established by the fiscal year end (12/31 for calendar year companies).
Other features include Participant Loans & Vesting.
Profit Sharing Profile
Sandi and Dave Miller own a small printing business with about 5 employees. They are in their mid 40s. After several years of struggling, they have now turned the corner and are making significant profits. The Millers know that they need to catch up on their retirement efforts. They are happy to make contributions to employees, but want to keep the employee contributions to a minimum.
Design
Sandi and Dave implement a profit sharing plan with a cross-tested design. This will allow them flexible contributions, the ability to tailor contributions to different employees based on their contribution to the business and vesting to help retain staff.
Investments
For their investments, they have chosen an individual account product that will let each employee monitor the company contributions to the plan. They are working with a financial planner to pick the best option available. They are very pleased to have a professional planner to handle their investments so they don't have to take time away from their business.
Success
The professional staff at Pension Strategies helped the Millers plan their retirement future and goals. They are very happy to know that each year as they make their plan contribution, they are on the road to a secure and comfortable retirement.