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Profit Sharing Plan
A business with variable profits seeking a flexible and cost-effective qualified retirement plan should consider a profit sharing plan.
Advantages :
- Employer contributions are generally tax-deductible, and contributions and investment earnings grow tax-deferred until withdrawal
- Diversification- Choose from a broad array of investment choices
- Flexibility - contributions are not mandatory, and the amount of contributions can change each year
Features:
Participant eligibility
Eligibility depends on the rules the business designs for the plan. Many companies require new employees to complete six months or even up to a year of service before they're eligible to participate. Some companies also require employees to be at least 21 years old to participate.
Contribution limits
Total employer and employee contributions to all of an employer's plans are subject to an overall annual limit - the maximum 401(k) deferral cannot exceed a total of $14,000 ($18,000 for age 50 and older) in 2005.
Plan description
Profit sharing plans allow employers to make tax-deductible contributions for each plan participant. Profit sharing plans also feature additional services, such as loans, that SEP or SIMPLE plans do not.
Plan type
In addition to traditional profit sharing plans, age-weighted plans, structured to benefit older, highly compensated employees, are available.
Plan eligibility
Generally, a profit sharing plan can be established as long as the business does not maintain any other defined benefit or defined contribution plan.
Participant eligibility
Any employee age 21 and older who has completed two years of service must be included in the plan. (Less restrictive eligibility requirements can be established.)
Employer contribution
Employer contributions are discretionary - the employer chooses how often and how much to contribute. For 2005, a tax deductible contribution up to the lesser of 25% of compensation (up to $210,000) or $42,000 can be made for the owner and each eligible employee.
Employee contribution
Employee contributions are not permitted in profit sharing plans.
Employee loans
Employee loans are permitted.
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