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”.