Profit Sharing Plans

A Profit Sharing Plan is a Defined Contribution Plan that provides employees with contributions made by their employer.  In its basic form, this type of plan is the easiest to administer and the easiest for employers and employees alike to understand.  Depending on the objectives of the company however, various provisions may be added to the plan which could enhance the benefits received.

Advantages

  • Flexible and discretionary employer contributions.
  • Contribution allocation may be structured in various ways, such as:
    1. Basic allocation of providing the same percentage or dollar amount to each participant;
    2. Allocating the contribution on a Social Security Integrated basis, thereby skewing the benefit in favor of higher paid employees;
    3. Allocating the contribution on a Cross-Tested basis, thereby skewing the benefit in favor of older employees (see Cross-Tested Plans);
  • May include a 401(k) employee deferral provision.
  • Least costly to administer in its basic form.

Profit Sharing Plans are Ideal for ...

  • Employers wishing for discretionary contributions.
  • Employers with profit fluctuations.
  • Employers with limited resources.

Disadvantages

  • If not structured properly, may fall short of providing maximum benefits available.

Example

Assuming the same contribution amount, following is an example of a Basic, a Social Security Integrated, and a Cross-Tested allocation 

  Age Wages Basic  Soc. Sec. Integrated Cross-
Tested
Owner 54 200,000 27,703 30,728 40,000
Spouse 54 18,000 2,493 2,129 1,845

Subtotal

  218,000 30,196 32,857 41,845
           
Staff 1 41 18,000 2,493 2,129 900
Staff 2 35 34,600 4,793 4,093 1,730
Staff 3 53 17,000 2,355 2,011 850
Staff 4 24 15,000 2,078 1,775 750
Staff 5 50 25,000 3,463 2,957 1,250
Staff 6 49 22,000 3,047 2,603 1,100

Subtotal

  131,600 18,229 15,568 6,580

 Grand Total

  349,600 48,425 48,425 48,425