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Profit Sharing Plans

A profit sharing plan is a retirement plan in which the contributions are made solely by the employer.  The employer has the flexibility to contribute and deduct between 0% and 25% of the eligible participants gross compensation. The amount contributed each year is discretionary and does not depend on the profits of the employer. Corporations, Sub-Chapter S, Self-Employed, Sole Proprietorships, Partnerships, LLCs and Non-Profits can establish profit sharing plans. Plans must be established by fiscal year-end (December 31 for calendar year plan).

Several alternatives for allocating employer contributions are available:

Non-Integrated – Allocates contributions proportionately to each employee (e.g. as a percentage of compensation).

Integrated – Allocation formula takes into account the disparity in benefits under Social Security and allocates a larger portion of the employer contribution to compensation above an “integration level”.

Age-Weighted – The employer designs the allocation formula to provide a greater benefit to older employees, who usually are highly compensated employees. An age-weighted plan calculates a “benefit factor” for each participant based on the number of years the participant has remaining to normal retirement age using the same assumptions used to “normalize” allocation into benefits. The plan then allocates the employers annual contribution (and participant forfeitures, if any) on a pro rata basis, based on the ratio of each participant's benefit factor to the aggregate benefit factors of all participants.

New Comparability – A profit sharing plan in which employees are divided into groups with each group receiving a contribution that is a different percentage of compensation. The simplest form of grouping employees is to have the owners in one group and all other employees in another group.  Some employers have several groups such as owners, managers, professional staff, clerical staff, etc.
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