Broker Check

The Profit Sharing Plan

A Key Supplemental Retirement Vehicle

A Profit Sharing Plan often serves as a company’s key supplemental retirement vehicle.  In the good years when businesses have the extra resources to fund retirement savings, the Profit Sharing Plan provides the flexibility that small to medium business owners want and desire as a key component of their overall wealth accumulation strategy.

The Profit Sharing Plan is funded by the employer on a discretionary basis -- only when the company has sufficient income or assets.   It is best suited for employers who do not want to make mandatory annual retirement contributions.   The profit-sharing plan is ideal for the business that wants to reward long-term employees by using vesting schedules.   Businesses with part-time, seasonal, or terminated employees can establish plans to exclude employees who work less than 1,000 hours.   Union employees can also be excluded unless participation is negotiated under a collective bargaining agreement.    

Eligibility:  Employers can provide that employees must have 1 year of employment before they are eligible to participate.   Upon participation, employees are then subject to a Vesting Schedule.    A 2 year waiting option is also available, however, under this alternative employees are 100% vested when they start to participate. 

Vesting Schedules: 3 year cliff schedule, or a 6 year graded schedule for top-heavy plans.   Upon termination of employment, non-vested portions are forfeited.

Possible Vesting Schedules with 1 Year Eligibility Requirement

        Years of
Service Completed

3 Year Cliff
Vesting Schedule

6 Year Graded
Vesting Schedule

1

   0 %
(no participation until
1 yr of service completed)

  0 %
(no participation until
1 yr of service completed)

2

   0 %

  20 %

3

100 %

  40 %

4

 

  60 %

5

 

  80 %

6 and thereafter

 

  100 %



2007 Maximum Contribution: Up to 25% of compensation with a maximum of $45,000 for all plans, or $50,000 with a 401(k) catch up contribution for employess age 50 or older.     Maximum compensation considered is $225,000.

Illustration:  See the Safe Harbor 401(k) with Age Based Profit Sharing Plan Illustration to see how this type of plan may be able of a benefit to the small business owner.