401(k) Profit Sharing Plan

You decide how much your company will contribute each year.

Don't let the name fool you, you don't need to have high profits to add profit sharing to your 401(k) plan. What it means is that you can add dollars to your and your employees' retirement accounts based on how your business does each year. This is purely discretionary and the amount can range from $0 dollars up to whatever amount makes sense for your business.

Profit Sharing Plan for Small business

the Benefits of having a 401(k) with profit sharing

A company-sponsored 401(k) plan with profit sharing can be a valuable tool in helping your employees get ready for retirement, and also provide benefits to both employers and employees.

  • Contribution flexibility. The employer has the flexibility to choose how much to contribute to the plan each year, including the option to make no contributions for the year.
  • Contributions are tax deductible. Contributions to the Profit Sharing Plan are a deductible business expense. Earnings on the contributions grow tax-deferred for your employees.
  • Employees like it. Similar to an employer match, employees see profit sharing contributions to their 401(k) plan as free money from their employer that helps them achieve their retirement goals.
Profit Sharing Plan 401(k)

When to add a vesting schedule

Business owners often are concerned that employees will leave the company and take their profit sharing dollars with them. You can set a schedule so that employees vest into their profit sharing contribution gradually over time.

A vesting schedule can be set up for a profit sharing plan, or any type of employer contribution. It allows you to determine when an employee qualifies to receive all of their employer contributions.

401(k) with Profit Sharing Plan

Employer contributions and limits

The simplest and most common profit sharing implementation is for the employer to contribute a flat dollar amount that is allocated based on a percentage of the employees' annual compensation. Total annual contributions limits are based on how much the employee defers, plus how much the employer contributes. The total amount contributed to the plan cannot exceed the lesser of:

  • 100 percent of the participant’s compensation; or
  • $54,000 for the 2017 tax year (for those 50 or over, an additional $6,000 is allowed as a catch-up contribution)