+Who can establish a Profit-Sharing Plan?
Sole proprietors, partnerships, corporations, nonprofit and government entities may establish Profit-Sharing Plans.
+What is the deadline for establishing a Profit-Sharing Plan?
The deadline for establishing a Profit-Sharing Plan is the due date of the business tax return (including extensions) of the year for which the contributions are being made.
+Are vesting schedules permitted in Profit-Sharing Plan?
Yes, under most Profit-Sharing Plan arrangements you can choose to include a vesting schedule.
+Which employees must be covered by a Profit-Sharing Plan?
Although you may adopt less restrictive requirements to determine which employees are eligible to participate in your Profit-Sharing Plan, you generally must include employees who
Note: In addition, union employees and nonresident alien employees may—under specific circumstances—be excluded from participation in a Profit-Sharing Plan.
+What is the contribution limit for a Profit-Sharing Plan?
Profit-Sharing Plan contributions for any one participant cannot exceed the lesser of 25% of compensation or $66,000 (2023) or $69,000 (2024).
+Must I contribute to a Profit-Sharing Plan every year?
No, you are not required to make contributions every year to a Profit-Sharing Plan.
+How are Profit-Sharing Plan contributions allocated between eligible plan participants?
Often, Profit-Sharing Plan contributions are allocated among eligible plan participants on a pro rata basis (i.e., each eligible participant receives a contribution equal to X% of his or her pay). Some Profit-Sharing Plan arrangements may provide additional allocation alternatives.
+What is the deadline for making contributions to a Profit-Sharing Plan?
Contributions must be made by the due date of the business tax return (including extensions) of the year for which the Profit-Sharing contributions are being made.
+What information must be provided to employees concerning a Profit-Sharing Plan?
Plan sponsors must provide employees who are eligible to participate in the Profit-Sharing Plan with a copy of the Summary Plan Description (SPD) and the summary annual report— and participants must receive an annual account statement. In addition, plan participants may request that additional information be provided.
+Are there restrictions on when participants can take distributions from a Profit-Sharing Plan?
Yes. Triggering events as defined in the plan document govern when participants may take distributions from a Profit-Sharing Plan. A Profit-Sharing Plan may permit a distribution of a participant’s vested accrued benefit when the participant terminates employment (by death, disability, retirement, or other severance from employment), reaches a specific age, suffers a hardship, or experiences another “distribution triggering event” specified in the plan.
+Are participant loans permitted under a Profit-Sharing Plan?
Yes. Many, but not all, Profit-Sharing Plan arrangements allow for participant loans.
+Are Roth contributions permitted under a Profit-Sharing Plan?
Under the SECURE 2.0 Act, Profit-Sharing Plans now have a Roth funding option. That is, the plan could permit participants to elect to take employer contributions as Roth contributions. But until we receive practical IRS guidance on how to implement such an option, it is unavailable.
+Is there any government reporting that is required by an employer sponsoring a Profit-Sharing Plan?
Businesses sponsoring a Profit-Sharing Plan must annually file a Form 5500-series return with the federal government. In addition, plan sponsors must provide certain disclosures to plan participants on an ongoing basis.
+How is a Profit-Sharing Plan different from a SEP Plan?
Both Profit-Sharing Plans and SEP Plans are funded by employer contributions. Under both types of arrangements, the employer determines the applicable funding on a year-by-year basis, with contribution levels ranging from 0% to 25% of compensation. The maximum contribution amount for one participant for under either type of plan is $66,000 for 2023 and $69,000 for 2024.
Contributions under a Profit-Sharing Plan are made to a group trust that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor. With a Profit-Sharing Plan, you—as the plan sponsor—have greater control over the ongoing administration of the plan (e.g., you can implement various restrictions on withdrawals with “distribution triggering events” and vesting schedules). Profit-Sharing Plans may also offer additional plan features such as plan loans.
SEP Plans do not offer as many options as Profit-Sharing Plans (e.g., restricted access to funds, vesting schedules, or plan loans). With SEP Plans, contributions are made to the eligible employees’ Traditional IRAs (often referred to as “SEP IRAs”). Because the SEP Plan contributions are made to the IRAs of the eligible employees, SEP Plans are typically less costly and less time consuming to administer.
+How is a Profit-Sharing Plan different from a 401(k) Plan?
401(k) Plans provide tremendous funding flexibility. 401(k) Plans are funded through employee payroll deferral contributions with an option to also be funded with employer contributions (e.g., profit-sharing and matching contributions). While 401(k) plans often include an employer funding component, not all types of 401(k) arrangements require employer funding. Under a 401(k) Plan, the employer is eligible to contribute as little as 0% of compensation or up to as much as 25% of compensation on behalf of each participant. In addition, each employee can elect to make additional “employee deferral” contributions of up to $22,500 ($30,000 if age 50 or older) for 2023 and up to $23,000 ($30,500 if age 50 or older) for 2024. The maximum aggregate contribution that may be allocated to any one employee is $66,000 ($73,500 if age 50 or older) for 2023 and $69,000 ($76,500 if age 50 or older) for 2024. If a 401(k) Plan allows for Roth contributions, the employee salary deferral portion of the contribution can be either pre-tax or after-tax (i.e., Roth). Employer contributions to a 401(k) Plan, on the other hand, are strictly pre-tax.
Unlike 401(k) Plans, which allow for employee salary deferral contributions, Profit-Sharing Plans are funded exclusively through employer contributions. With a Profit-Sharing Plan, the plan sponsor determines the applicable funding each year , with contribution levels ranging from 0% to 25% of compensation. The maximum amount that may be allocated to any one plan participant’s account under a Profit-Sharing Plan is $66,000 for 2023 and $69,000 for 2024.
+How is a Profit-Sharing Plan different from a SIMPLE IRA Plan?
A SIMPLE IRA Plan is a simplified, cost-effective type of plan that is funded primarily through employee salary deferral contributions but also requires a modest employer contribution. SIMPLE IRA Plan contributions are made to the SIMPLE IRAs of each eligible participant. Once funds are contributed to each eligible participant’s SIMPLE IRA, the funds are controlled by the plan participant, meaning the plan sponsor does not bear the ongoing responsibility of overseeing the administration of a group trust account. This provides each plan participant with maximum control over his or her own retirement funds while simultaneously relieving the plan sponsor from the additional burdens and responsibility of ongoing plan administration.
Profit-Sharing Plans, on the other hand, are funded exclusively through employer contributions. With a Profit-Sharing Plan, the plan sponsor determines the applicable funding each year, with contribution levels ranging from 0% to 25% of compensation. Contributions under a Profit-Sharing Plan are made to a group trust that is administered by the plan sponsor or by a third-party administrator hired by the plan sponsor.Under this type of arrangement, the plan sponsor has control over the ongoing administration of the plan. Profit-Sharing Plans may also offer additional plan features not available with SIMPLE IRA Plans such as withdrawal restrictions, vesting schedules, and plan loans.