Profit Sharing Plans

Profit sharing plans are defined contribution plans that allow an employer to share profits or expense savings with employees to assist in funding their retirement. All types of employers may sponsor these plans.

Contributions
Contributions are generally made at the discretion of the employer based on a formula derived from company profits. The employer deduction for any contributions is limited to 25% of plan payroll. The contribution formula may be as simple as a stated percent of profits, or may be more complex involving such features as:
  • Social Security Integration
  • Age or Service Weighting
  • Cross Testing

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Traditional/safe harbor 401(k) Plans

A 401(k) plan refers to a defined contribution plan that is covered by Section 401(k) of the Internal Revenue Code. This plan type allows employees to make an election to defer a portion of their salary on a pre-tax basis and contribute the deferred amount into a qualified plan. The ability to defer salary on a pre-tax basis is often referred to as a cash or deferred arrangement (CODA). Deferral amounts must be made through payroll deduction and all employee deferrals to any employer-sponsored 401(k), 403(b) and/or SARSEP plans are limited annually. Some plans may allow employees to make after-tax contributions as well.

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New Comparability 401(k) Profit Sharing Plans

Cross Testing
Cross testing allows a defined contribution plan to be tested on the basis of benefits rather than contributions. These plans can be nondiscriminatory even though they are designed to allow the highest employer contribution levels for older, more highly compensated employees. New comparability formulas are a popular method of cross testing.
Benefits
Withdrawals from profit sharing plans function similarly to other defined contribution plans. The amount of vested benefits is generally available as a lump sum distribution at termination of employment.

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Cash Balance Plans / Combos

Cash balance plans are a hybrid of defined benefit and defined contribution plans and are available to all types of employers. However, these plans also have features that are common to defined contribution plans such as a hypothetical account balance for each covered employee, with interest credited to the account annually.

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Money purchase Plans

A money purchase pension plan is available to all types of employers and requires the employer to make a specific formula driven contribution to the plan each year. This contribution is not discretionary and may not be based on profitability. These contributions and their earnings are allocated to participant accounts. The participant is only entitled to the benefit that can be purchased with the account balance; hence, the name money purchase.

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ESOP Plans

Employee stock ownership plans (ESOPs) are a special type of defined contribution plan, which invests exclusively in the stock of the sponsoring employer. ESOPs are popular as a retirement vehicle, an employee incentive vehicle, and a corporate finance vehicle. Like many defined contribution plans, the rules have changed substantially over time. ESOPs have taken on different nicknames or acronyms that reflected the rules they were subject to at that time.

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Non-profit 403(b) Plans

403(b) plans are retirement plans that are covered by Section 403(b) of the Internal Revenue Code. These plans are similar to 401(k) plans, but are available only to tax-exempt organizations such as hospitals, educational institutions, public school systems and universities, and charitable organizations.

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Governmental 401(a) and 457 Plans

Deferred compensation 457(b) plans are available to both government, typically state and local, and non-governmental 501(c)(3) organizations. In the case of the non-governmental 457(b), the plan is available to a select group of top management or highly paid employees.

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Davis Bacon-Prevailing Wage Plans

The Davis Bacon Act generally requires that a contract between a private party and government of the United States for construction/repair by mechanics or laborers must meet certain prevailing wage and benefit requirements. The policy underlying the Davis Bacon Act in which a non-union contractor that wins a government contract must provide wages and fringe benefits that is similar to the wages and fringe benefits that would be provided if a union contractor won the contract. Contractors have the option of paying the fringe rate as additional compensation to the worker or actually use the hourly rate to provide qualifying retirement plan benefits.

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Multiple Employer Plans

A multiple employer plan (MEP) is a qualified defined contribution or defined benefit retirement plan that is maintained by two or more unrelated employers.

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