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• Simplified
Employee Pension (SEP)
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Simple IRA
•
Profit Sharing
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Age-weighted/comparablility profit
sharing plans
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401(k) profit sharing
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Safe-harbor 401(k)
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Owner only/one-person 401(k)
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Defined benefit pension |
Profit Sharing Plans
Profit sharing plans offer both design flexibility and discretion
as to making contributions. Company contributions are determined by
the employer and can be allocated in a number of ways. If the company
makes little or no profit during a year, no contribution is required,
although low profits don’t restrict the contribution level.
A profit sharing plan can include an option allowing the company to
make contributions even if the company has no profit.
Eligibility
Typically, the eligibility provisions require an employee to have
one year of service and be at least 21 years of age. A two-year service
period may be imposed if full immediate vesting is provided. For most
plans, a year of service is defined as working 1,000 hours in a plan
year.
Contributions
An employer’s maximum deduction is limited to 25% of the annual
compensation paid to eligible employees. The individual maximum contribution
limits for employees applied to all defined contribution plans are
the lesser of 100% of compensation or $44,000. Depending on the allocation
formula in a profit sharing plan, the contributions for individual
employees may exceed the 25% level as long as the aggregated employer
contribution does not exceed the 25% maximum employer contribution
limit.
Advantages
The employer can make a discretionary contribution each year, which
can be subject to a vesting schedule. A profit sharing plan may be
integrated with Social Security or may utilize one of the allocation
methods described in a later section of this brochure.
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