Profit sharing plans offer employers, especially small business owners, flexibility with regard to contributions. Contributions to a profit sharing plan (PSP) are discretionary. The employer can choose when and how much to contribute. If profits are low during a year no contribution is required. Conversely, employers can make contributions even if the company is not profitable.
All contributions to a profit sharing plan are deductible for federal, and in most cases, state income tax purposes. An employer’s maximum deduction is limited to 25% of the annual compensation paid to eligible employees. For 2012, the individual maximum contribution limit for employees is of 100% of compensation or $50,000, whichever is less.
There are three basic types of profit sharing plans; traditional, age-weighted, and new comparability. In a traditional PSP, contributions are based on a fixed percentage of an employee’s salary. The age-weighted method allocated contributions based on the age and total compensation of eligible employees. This is similar to a defined benefit pension, but employer contributions are discretionary. The new comparability allocation method allows an employer to divide its employees into different classifications for purposes of allocating contributions.
Like most retirement plans, PSPs allow for tax-deferred growth of all contributions until withdrawal at retirement. PSPs serve as a great way to attract and keep talented employees. Kolinsky Wealth Management specializes in designing and administering employee sponsored retirement plans. We help write the plan document, create a trust for the plan’s assets, develop a recordkeeping system, and provide plan information to the participants. Contact us today to get started on your plan.