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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
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.
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.
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
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