Types of Profit Sharing Plans
Not all profit sharing plans are created equal. They may be discretionary or fixed, but we find that 99% of plans elect the discretionary option. An employer may choose to provide the same % of pay to all employees, the same $$ amount, steer funds to key employees, provide a higher % of pay to higher income employees & more. Among the options are:
This is the most common form of profit sharing plan. Basically, the employer may choose to provide the same percentage of pay or same dollar amount to all eligible employees.
Permitted Disparity or Integrated
As FICA taxes are only applied on income up to the Social Security Wage Base each year ($127,200 for 2017), many employers choose to provide an extra contribution for income above a percentage of that threshold. This may be valuable for higher income business owners who are of similar age as their employees.
Uniform Points Allocation
The most common method is to allocate “points” based on age & service. As an example, a 50 year old employee with 20 years of service would receive 70 (50 + 20) points. The total profit sharing contribution (e.g., $50,000) shall be allocated to each participant in relation to their share of the total points.
Age Weighted Allocation
This option allows for higher contributions for older employees who are closer to retirement age. This design is best suited for groups with a smaller percentage of older employees.
This method does require actuarial calculations to ensure that it meets nondiscrimination requirements. The employer is encouraged to seek guidance prior to providing such allocations.
Employee Group or New Comparability Allocation
Employees are designated to be part of a group based on a reasonable business classification (e.g., job title or function) or the employer may choose to make each employee their own group. Then, the employer chooses a contribution rate for each group – normally used to steer a much higher percentage of the contributions to owners or key staff.
It’s important to note that this method requires nondiscrimination testing to ensure that benefits do not overly factor the highly compensated employees (“HCE’s”). The employer is encouraged to seek guidance prior to providing such allocations.
If you complete the form, we will send you a free profit sharing calculator (up to 25 employees) for pro-rata, permitted disparity, or uniform points allocation. If you have an age-weighted or new comparability formula, please give us a call and let’s see if we can be of help.
Fill out the form below to download the profit sharing calculator
Sample Of How A NewComparability Plan Design May Work
The illustration shown above is meant to provide general information related to potential plan design opportunities and is not intended to be a financial plan or investment advice from Odyssey Advisors. These represent general guidelines which may be helpful in making personal financial decisions. Responsibility for these decisions is assumed by you, not Odyssey Advisors. This communication is provided with the understanding that Odyssey Advisors is not rendering legal, accounting, or tax advice. To obtain specific advice about your particular situation, please contact us for a customized plan design illustration.