Profit Sharing Plans

How These Plans Work
  • An employer makes contributions to a profit sharing plan on a discretionary basis but is not obligated to do so
  • Employer contributions are tax deductible even if the company has no profits
  • Profit sharing contributions are credited to accounts established for each employee in a trust on the basis of each employee’s pay, age or service, or on some other objective basis that is subject to nondiscrimination tests
  • Profit sharing contributions can be coordinated with Social Security to give highly compensated employees a larger share of the total contribution
  • Contributions grow in a tax-deferred trust that is protected from creditors of the company and the employee
  • When an employee retires or leaves the company, his/her account can be rolled over to an IRA or the next employer’s retirement plan (if that plan accepts rollovers) to continue the tax-deferred status
  • Some plans allow employees to take a loan from their accounts
  • Some plans permit employees to withdraw from their accounts to meet a financial hardship
Things To Note
  • Profit sharing contributions can be credited on other objective criteria, subject to nondiscrimination tests to ensure that highly compensated employees do not overly benefit
  • An employer can create various employee groups that get different rates of profit sharing contributions, subject to nondiscrimination tests
  • A vesting schedule can be applied to profit sharing contributions such that an employee might only get part of the profit sharing account when he/she leaves the company
  • A profit sharing account can be distributed when an employee has been participating in the plan for a fixed number of years, or after his/her contributions have been in the trust for a set period of years, as long as the plan allows for these features
  • A stock bonus plan is similar to a profit sharing plan with the exception that distributions to employees upon termination of employment or retirement must generally be made available in employer stock
What We Can Do
  • Evaluate your objectives and recommend possible plan designs
  • Consult with you on regulatory changes and emerging trends
  • Perform modeling to determine the costs of varying rates of profit sharing contributions
  • Perform annual nondiscrimination and coverage testing; identify corrective measures if tests fail
  • Assist in vendor searches to find appropriate service providers for your plan
  • Help with employee communications, including communication materials, employee meetings and workshops
  • Prepare plan documents, plan amendments, and required communications to employees
  • Assist in qualifying your plan with the IRS, including preparation of IRS submissions
  • Provide administration for your plan – daily valuation or traditional recordkeeping, process loans and distributions, including preparation of required governmental information returns related to distributions from the plan
  • Prepare the annual 5500 return/report required by the IRS, including any necessary interface with the plan’s independent auditors
  • Assist you with any IRS or DOL audit of your plan