Profit Sharing Plans

A Profit Sharing Plan clearly favors businesses with unpredictable earnings, since employer contributions to these plans are discretionary rather than required. If your company wants to control critical plan features like participant eligibility and vesting in your company sponsored retirement plan, you might consider sponsoring a Profit Sharing Plan. This plan is funded solely through discretionary employer contributions and is widely considered the most simplistic qualified retirement plan.

Total profit sharing contributions may not exceed 25% of total eligible payroll. A combination of profit sharing plan with a Money Purchase Plan allows for greater total contribution while retaining a degree of flexibility [SUBJECT TO CHANGES IN THE LAW UNDER EGTRRA IN 2002].

Also, non-vested account balances which have been forfeited by terminated employees may be redistributed to the accounts of remaining participants or used to reduce the employer's future contributions. In addition, provisions for loans and hardship withdrawals may also be included in the design of the plan.

So, if your circumstances require significant employer flexibility in determining which employee can participate in your company's plan, or how the contributions will be allocated and when those contributions are vested, then consider the following details of the Profit Sharing Retirement Plan.

PROFIT SHARING PLAN
OVERVIEW
PRIMARY BENEFITS
Discretionary employer contributions
Flexible vesting schedule
Alternative contribution allocation methods permitted
May apply eligibility criteria
Loans and hardship withdrawals allowed

NOTE ALSO
Involves top-heavy testing; moderate administration required
Funded solely by employer
Government reporting required

PROFIT SHARING PLAN
DETAILED SUMMARY
Plan Size
Businesses of all sizes
Individuals with self-employment income, earned on either a full or part-time basis

Plan Adoption And Contribution Deadlines

Must be established by the employer's fiscal year end
Employer contributions must be made by employer's tax-filing deadline, including extensions

Employee Eligibility Requirements

Flexible, however any employee 21 years old with 1,000 hours of service per year for two or more years must be eligible for the plan

Funding

Employer-funded only
Contributions are discretionary
May utilize various allocation methods

Maximum Annual Contributions

Maximum contribution allocated to an employee of 100% of participant's annual compensation or $40,000, whichever is less
Maximum overall plan contribution limited to 25% of company eligible payroll
Maximum overall contribution for sole proprietor or partnership plan sponsors limited to 13.04% of net profit or partnership income

Vesting

Dependent on vesting schedule selected by the employer
With a one year of service requirement vesting may be graded for a period up to seven years (If two years of service are required for eligibility, contributions must be 100% vested immediately)

Withdrawals And Loans

Withdrawals are taxed as ordinary income and are subject to a 10% tax penalty unless taken after the attainment of age 59.5 or because of death or disability
Availability of hardship withdrawals
Availability of loans

Administration And Reporting

Employees must be given notice when the plan is established and new employees must be notified when eligible
Top-heavy and non-discrimination testing required
Annual limits and loan tracking required
Required filing of IRS Form 5500
Requires a Summary Plan Description and a Summary Annual Report

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