|
Profit Sharing Plans are programs for Employers that want to provide a "company pay all" retirement plan for its employees. These plans are more flexible than Pension Plans, because Employers are not committed to a fixed contribution each year. Contributions can range from nothing in some years up to 25% of eligible payroll. The maximum annual addition to a participant's account can be 100% of pay not to exceed $45,000. The maximum salary that can be used for these calculations, for individual participants, as of 2007 is $225,000 (indexed for the cost of living).
There is no minimum number of employees required to sponsor a Profit Sharing Plan. Plans generally cover any employee that has worked 1 year for the Employer. In addition, plans can be designed to cover certain employer groups and not others.
Traditional Profit Sharing Plans
In this type of plan the Company contribution is generally allocated among eligible participants as a percentage, based on each participants compensation that is in ratio to the total compensation of all eligible employees, otherwise known as a prorata allocation. Other formulas available include allocating based on age and years of service, while some programs simply give everyone the same dollar amount.
Integrated Profit Sharing Plans
Similar to the traditional plan, the allocation formula favors participants who exceed the social security wage base. The reason this plan is very popular is because those who earn more than the social security wage are limited to what social security will provide. Since higher paid employees are in a sense discriminated against, the Company plan can supplement by giving those employees more benefits. Age Weighted Profit Sharing Plans
These plans provide higher allocations to participants that are closer to retirement. Tiered Profit Sharing Plans
These plans are also called Super Integrated or New Comparability Plans.
The plan establishes tiers or groups of participants. Each tier or group can have a different allocation formula. It is possible for the highest tier to obtain 25% of pay and the lowest tier 5% of pay. In order to have this kind of plan you must pass certain non discrimination tests each year. The test will dictate the percentage contribution for each tier. |
