Providing a way to reward and retain employees, profit-sharing plans are relatively easy to administer and, likewise, are easy for employees to understand. They also provide employers with some flexibility regarding the amount they contribute every year. Profit-sharing plans can stand alone, or can be provided in tandem with a 401(k) Plan that allows pre-tax employee contributions.
- Employers make an annual contribution to all eligible employees equal to a certain percentage of their annual pay. Overall, the total amount contributed cannot exceed 25% of total, eligible payroll.
- Employers do not need to make a contribution every year, as long as—over the long-term—their contributions are “substantial and recurring.”
- Employees are not taxed on the contributions made on their behalf and the earnings on those contributions are not taxed until they are withdrawn. Likewise, employers are not taxed on the money they contribute.
- Employees can direct the way their funds are invested, if the plan allows.
- Vested contributions can be rolled over into an IRA or a future employer’s plan if an employee leaves the organization. However, if employees leave—and their funds are not vested—their money is forfeited back to the plan.
As with all employer-sponsored plans, there are many details you need to consider. We encourage you to contact us for a personal consultation regarding the benefits of a profit-sharing plan.