Services > Profit Sharing Plans

A Profit Sharing Plan is a defined contribution plan which the employer may determine and provide, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. This formula is what defines the different types of Profit Sharing Plans.

Traditional

In a traditional allocation, employer contributions are divided among the eligible employees on a comp to comp basis. In other words, each employee receives his or her portion of the contribution in the same ratio as his or her compensation in relation to the total eligible compensation of the company. For example: Employee A has compensation of $10,000. The total eligible payroll at the company is $100,000. Employee A would receive 10% of the dollars contributed to the plan for that year.

Age Weighted

An age-weighted profit sharing plan uses both age and compensation as a basis for allocating employer contributions among plan participants. Age and compensation are used as factors to determine the amount of the employer contribution. Because age is a factor, this type of plan favors older employees who have fewer years to accumulate sufficient funds for retirement.

Integrated

This type of allocation method is integrated with an overall retirement scenario that includes Social Security; this combination is called "permitted disparity". By providing for permitted disparity in it's qualified retirement plan, the employer gets the benefit of it's Social Security Tax payments.

Under an Integrated Profit Sharing Plan compensation is broken out into two parts; the amount above the integration level (excess compensation), and the amount below the integration level (base compensation). Usually the integration level is the Social Security Taxable Wage Base in effect for the applicable year. The employer is permitted to "offset" their contribution to Social Security by applying a lower contribution percentage to the base compensation (i.e.: the base percentage) and a higher contribution percentage to the excess compensation (i.e.: the excess percentage). In other words, employees with compensation above the Social Security wage base are allowed an additional contribution on that amount. This shifts the allocation toward the higher paid employees.

New Comparability / Cross Tested

In this type of Plan, the employer segregates the eligible employees into "non-discriminatory" categories (i.e.: job description, title, hourly vs. salaried, etc.) and designates different contribution rates for each group.

Because of the potential for discrimination in favor of "Highly Compensated Employees" this type of Plan is required to perform special tests each year to ensure that the contributions do not violate IRC Sec. 401(a)(4) and 410(b) non-discrimination regulations. If the Plan does not pass these tests, the contribution rates for some/all groups must be adjusted. Also effective beginning with the 2002 plan year, in most cases, each NHC cannot receive a contribution that is less than 5% of salary regardless of the results of the non-discrimination tests.

This type of Plan is normally designed to favor the highly compensated employees or older employees. However, it can be designed to favor any group of employees assuming the annual "non-discrimination" requirements are satisfied.

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