Profit-sharing plans allow employers to make discretionary, tax-deductible contributions for their employees. However, profit-sharing plans provide employers with more control over eligibility requirements and vesting schedules.
Advantages of a Profit-sharing Plan
- High Contribution Limits – For 2013, employers may contribute up to the lesser of 25 percent compensation or $51,000.
- Choice – The amount of the contribution can change from year to year and is up to the employer to determine (called a “discretionary” contribution).
- Integration Permitted – Contributions may either be a flat percentage of each employee’s compensation, or they may be integrated with the Social Security taxable wage base ($113,700 for 2013). Employees earning more than this receive a greater portion of the contribution to compensate for the smaller percentage of Social Security benefits they accrue.
- Flexibility – Employer may establish a vesting schedule and decide whether or not to make loans and hardship withdrawals available to participants.
- Eligibility – Part-time and seasonal employees may be excluded with eligibility requirements.
Other Profit-sharing Plan Considerations
- Subject to ERISA reporting.
- Moderate administration.
- In general, the same percentage of compensation must be contributed on behalf of all participants.
- Instead of having a separate profit-sharing plan, it is possible to include a profit sharing provision within a 401(k) plan. For 2013, if a profit-sharing feature is offered in conjunction with a 401(k) plan, the combination of employee deferrals and employer contributions (including matching contributions) is the lesser of $51,000 or 100 percent of compensation.