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Overview
Contributions to a profit-sharing plan are 100% discretionary. There is no
set amount that you need to make. If you can afford to make some amount of contributions
to the plan, then go ahead.
If you do make contributions, you will need to have a set formula for determining how the
contributions are divided. It is required that these monies go into a separate account for
each employee.
One common method for determining each participant’s allocation in a profit-sharing
plan is the “comp-to comp” method. Under this method, the employer calculates
the sum of all of its employees’ compensation (the total “comp”). To
determine each employee’s allocation of the employer’s contribution, you divide
the employee’s compensation (employee “comp”) by the total comp. You then
multiply each employee’s fraction by the amount of the employer contribution. Using
this method will get you each employee’s share of the employer contribution.
If you establish a profit-sharing plan, you:
Can have other retirement plans;
Can be a business of any size;
Need to annually file a Form 5500; and
As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you
want to. Pre-approved profit-sharing plans are available to cut down on administrative
headaches.
Information List
Greater flexibility in contributions – contributions are strictly discretionary.
Good plan if cash flow is an issue.
Administrative costs may be higher than under more basic arrangements.
Need to test that benefits do not discriminate in favor of the highly compensated employees.
Who Contributes: Employer contributions only.
Contribution Limits: The lesser of 25% of compensation or $46,000 in 2008 ($49,000 in 2009 and subject to cost-of-living adjustments for later years).
Filing Requirements: Annual filing of Form 5500 is required.
Participant Loans: Permitted.
In-Service Withdrawals: Yes, but subject to possible 10% penalty if
under age 59-1/2.
Reminders
Like other qualified plans, the contributions are made with pre-tax money and all earnings accumulate tax free until withdrawal. However, self-employed people who are deemed as an owner/employee cannot contribute to this plan unless they provide benefits for all other full time, eligible employees. Employer contributions, on the other hand, do not have to be made each year. Lastly, as with any other tax qualified plan, the plan must be in writing prior to the end of the taxable year for which the deduction are claimed.
Action To Take If you are self-employed and are interested in evaluating a Profit Sharing or Keogh type plan, including various funding options, please click HERE. |
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