Profit Sharing Plan
Types of Plans
A Profit Sharing Plan is an employer sponsored retirement plan in which the contributions are made solely by the employer. The business owner has the flexibility to contribute and deduct between 0% and 25% of eligible participant’s compensation up to a maximum of $58,000 (2021).
Contributions are allocated in one of several methods:
- Same percentage of compensation for each participant
- Permitted Disparity
- Age-Weighted
Profit Sharing Plan Eligibility
- Sole proprietorships, partnerships, LLC’s, LLP’s or incorporated businesses,
(including subchapter S corporations), may establish a Profit Sharing plan. - All eligible employees must be allowed to participate in the Profit Sharing Plan.
Generally, an eligible employee is any employee who:- Has one year of service
- Has attained age 21
- Works 1,000 hours or more during a plan year
- Has not bargained in good faith for pension benefits
- Union employees and non-resident aliens who have no U.S source of income may
generally be EXCLUDED from coverage.
Of course, an employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.
Vesting
- If the service requirement is 1 year or less, a graded vesting schedule may be elected.
The most common graded schedule is 0% the first year and 20% per year thereafter. See the chart to the right for example…
|
Years of Service |
% Vested |
|
< 2 years |
0% |
|
2 but <3 years |
20% |
|
3 but <4 years |
40% |
|
4 but <5 years |
60% |
|
5 but <6 years |
80% |
|
6 or more years |
100% |
- If the service requirement is greater than 1 year, vesting must be 100% immediately upon becoming a participant in the plan.
Tax Advantages of a Profit Sharing Plan
- Employer contributions are tax deductible for the employer
- Tax-deferred growth potential is possible — any investment earnings grow tax-deferred until withdrawn.
Plan Deadline
The deadline to establish a qualified Plan coincides with the deadline for filing the sponsor’s tax return, including extensions. For calendar year entities the tax return is due March 15, or September 15 with extensions.
Contribution Flexibility
No annual contribution is required.
The appeal of a Profit Sharing Plan is the contribution percentage can vary each year. One may contribute between 0% and 25% of the compensation of the eligible employees, up to a dollar maximum of $58,000 (2021) per participant each year.
How do I get more information Profit Sharing Plans?
Call Bill Black
toll free at 888.412.4120
Or Fax or Email us
Fax: 321.397.0409
Email: Bill@PensionSpecialist.net
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