A profit-sharing plan accepts discretionary employer contributions. There is no set amount that the law requires you to contribute. If you can afford to make some amount of contributions to the plan for a particular year, you can do so. Other years, you do not need to make contributions. Also, your business does not need profits to make contributions to a profit-sharing plan.

If you do make contributions, you will need to have a set formula for determining how the contributions are divided.  Once the funds have been contributed to the plan, the Plan will establish a “plan” account for each participant in the retirement plan trust.

Pros

  • Flexible, discretionary contributions
  • Ability to control which employees receive contributions
  • Ease of explanation to employees

Cons

  • More expensive than its simpler cousin, the SEP IRA
  • Requires compliance testing to demonstrate that the plan does not favor Highly Compensated Employees

 

If you establish a profit-sharing plan, you:

  • Can be a business of any size
  • Can have other retirement plans
  • Must create a governing plan document
  • Need to annually file a Form 5500

As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you want. You may purchase a pre-approved profit-sharing plan document from a benefits professional or financial institution to cut down on administrative headaches.

 

Who contributes

Employer contributions only.

 

Contribution limits

The lesser of 25% of compensation or $55,000 (for 2018, subject to cost-of-living adjustments for later years).

 

Filing requirements 

Annual filing of a Form 5500-series return/report is required. Participant disclosures are also required.