There are common misunderstandings surrounding Profit Sharing contributions. Here, we aim to clarify some of the most prevalent ones.

Mandatory Annually… Profit Sharing is discretionary. Plan Sponsors can opt to skip certain years if the business isn’t profitable. They can also vary the amounts from year to year, maximizing contributions one year and reducing them the next.

Must Contribute By Year End… Businesses have until the tax filing day plus extensions to make Profit Sharing contributions. This flexibility allows them to assess the feasibility of contributions or determine the total amount that can be contributed.

Employees Immediately Own Contributions… Employees don’t immediately own Profit Sharing contributions. Vesting schedules can be set, requiring employees to work for a minimum number of years before gaining ownership. Forfeited amounts typically return to the plan for future contributions or expenses.

All Employees Must Receive Profit Sharing… Only eligible full-time employees are entitled to Profit Sharing. Part-time employees are not required to receive Profit Sharing contributions.

All Employees Receive Equal Allocations… While equal fixed contributions are an option, they are not mandatory. Plans can be structured so that the majority of contributions go to owners, with a minimum amount allocated to staff, provided the plan passes non-discrimination testing.

Profit Sharing is Costly… While Profit Sharing represents an additional expense for employers, the alternative often involves paying company profits in taxes. Offering Profit Sharing can reduce tax bills and serve as an incentive for employees. Many employers prefer providing benefits to their staff over paying taxes to the IRS.

Maintaining a 401(k) Profit Sharing Plan is less daunting than many believe. In fact, implementing one may be one of the best decisions for a business. Our clients have experienced significant success in hiring and retaining talent by offering a 401(k) Profit Sharing Plan as a benefit.

Contact us for a complimentary Profit Sharing Illustration that will provide an estimate of expected Profit Sharing contributions unique to your plan.