Profit Sharing Plans
What is a Profit Sharing Plan?
Features of Profit Sharing Plans:
- The contribution-allocation formula is defined in the plan document.
- Traditional formula: contribution is allocated in proportion to compensation
- Integrated with Social Security: slightly favors higher-compensated participants
- New Comparability (Owner-Weighted): favors older or key employees
- A participant’s benefit equals his vested account balance, which equals accumulated contributions plus investment gains or losses. Investments may be segregated or pooled, and the participant bears the investment risk.
- Contributions are discretionary and can range from 0% to 25% of Plan Compensation.
- The plan may allow for immediate participation or may require as much as two years of service before the employee may participate.
- Employees do not have to be entitled to 100% of the employer contributions until the completion of several years of service, as many as six years. Forfeitures may then be allocated to remaining participants and/or reduce future company contributions.
Pension Review Services custom-designs profit sharing plans in order to meet the objectives of the client.
Design features include:
- Type of Contributions
- Contribution allocation formulas
- Eligibility requirements
- Vesting schedules
Read about some specific design opportunities for Profit Sharing plans in our Case Studies section: “More Bang for Your Pension Buck”.