Profit Sharing Plan
Employers who desire flexibility in the
amount of their annual contribution traditionally
use Profit Sharing Plans. Often, this is
an employer whose annual profit fluctuates
and therefore cannot commit to an annual
required contribution. Under a Profit Sharing
Plan, an employer agrees to make annual
contributions but these contributions are
discretionary. Contributions are invested
on behalf of the plan participants. Distributions
are made to participants at retirement,
death, disability, or termination of employment.
Profit Sharing Plans work best for a company
- Prefers a flexible annual contribution.
- Wishes to provide a vesting schedule
to reward employees who remain employed
for many years.
- Does not wish to contribute to part-time
and/or temporary employees, as defined
by IRS guidelines.
Additional information pertinent to Profit
- Employer contributions may vary from
0% to 25% of the total annual eligible
payroll and are usually determined after
the close of each plan year.
- Total allocations (contributions plus
forfeitures) to a single participant cannot
exceed 100% of individual compensation
or the annual addition limit in effect
for that year ($54,000 for 2017).
- The annual compensation limit
is $270,000 for plan years beginning in
- A Highly Compensated Employee
is anyone in the current or look-back
year who is a 5% owner or received compensation
of more than $120,000 in 2017.
- Contributions and administrative
expenses paid by the plan sponsor are
- The Internal Revenue Code generally
requires that the employer make “substantial
and recurring” contributions and
the plan must satisfy annual nondiscrimination
- Plans must provide for minimum
benefits in any year that the plan is
determined to be top-heavy.
The NRS “Profit
Sharing Portfolio” (Profit Sharing
Retirement planning is important in today’s
world where employers are faced with more
responsibility for providing adequate retirement
savings for themselves and their employees.
Our “Profit Sharing Portfolio”
illustrates the four major allocation methods
available today: Salary Ratio, Social Security
Integration, Age-Weighted Compensation,
and New Comparability. Review the following
descriptions to see which most closely meets
Salary Ratio Allocation Method
The Salary Ratio Plan is the simplest of
the four allocation methods. It is designed
to allocate employer contributions to all
participants in proportion to their compensation.
For example, if one employee receives 10%
of his compensation as a contribution, all
employees who are eligible will receive
a contribution equal to 10% of their compensation.
The Salary Ratio Plan should be used for
employers where there are no distinct salary
or age differences in employees or where
the employer does not wish to target any
particular employees for higher contributions.
Social Security Integration
Employees who are earning compensation in excess of the Social Security Taxable Wage Base ($127,200
for 2017) accrue no government-provided
social security retirement benefits on compensation
that exceeds that amount. In order for those
employees to have retirement income more
comparable to their current income, the
Internal Revenue Service allows additional
allocations to such employees based on their
compensation above the Social Security Taxable
With this allocation method, an employer,
still limited to a total plan contribution
not greater than 25% of total eligible payroll,
can provide highly compensated employees
a larger allocation of contribution than
the lower-paid employees.
Social Security Integration Plans should
be used when employees who are targeted
to receive larger allocations are more highly
compensated than all other employees, but
whose age is the same or younger than other
The Age-Weighted Plan allows employers
to allocate contributions based on the age
and compensation of eligible employees.
Age-Weighted Plans greatly benefit employees
who are older and have fewer years than
younger employees to accumulate sufficient
funds for retirement. This could be owners,
officers or other employees. Special discrimination
testing is required.
Age-Weighted Plans should be used when
the employees to whom the employer wishes
to target larger allocations, are both older
and more highly compensated than all other
employees. These plans are generally designed
to be top-heavy.
New Comparability Allocation
The New Comparability Plan allows the employer
to divide the employees into specific groups
and allocate the contribution differently
to each group. The employer can give a larger
share of the company's contribution to those
employees whom the employer wishes to benefit.
Discrimination testing under a New Comparability
allocation formula is achieved by either
testing contributions alone or converting
contributions to an Equivalent Benefit Accrual
Rate (EBAR) similar to those used in defined
benefit plans. These accrued benefits are
then tested against each other to pass discrimination
tests. This is usually a complicated set
of calculations and normally requires actuarial
consulting, but is still less expensive
and more flexible than a defined benefit
New Comparability Plans are generally
used when the employer wishes to target
older highly compensated employees for larger
contribution allocations. These plans are
also designed to be top-heavy.