What is a Profit Sharing Plan?

A Profit Sharing Plan is a type of defined contribution plan where the employer makes discretionary company contributions. The money contributed to the employee profit sharing plan grows tax-free until distribution.


What are some unique characteristics about Profit Sharing Plans?

Contributions are not dependent on profits.

Contributions are discretionary, so the company does not carry an extra financial burden in down years.

Contributions are not required every year.

Contributions are flexible, so the company can make different contribution amounts in good years or bad.

Contributions are not required for every employee.

Contributions are subject to allocation conditions, so some employees can receive different amounts or even be excluded.

Contributions are tax deductible, so the company can use its plan as a tax planning tool with their CPA.

What formulas are in a Profit Sharing Plan?

There are two formulas that govern how an Employee Profit Sharing Plan will work.

The first is the contribution formula. This is almost always discretionary and not dependent on profits, thought it is possible to create a specific formula.

The second is the allocation formula. This tells the plan how it will assign the money contribution to certain classes of employees.

There are several common allocation formulas, each has certain advantages and disadvantages.

• Flat-dollar
• Salary-ratio
• Integrated
• Cross-tested

How can Trinity Pension Consultants help?

Since Profit Sharing plan contributions are made entirely by the employer, it’s important for these contributions to work towards the employer’s goal.

For some, this is to attract, retain, and reward their employees by providing a meaningful benefit. For others, it’s to maximize the contribution to the owner in the most tax-efficient manner possible.

Trinity Pension Consultants can help you understand all of these aspects of profit sharing plans:

• Prepare projections and illustrations of the various allocation formulas
• Help you determine which allocation formula meets your goals
• Coordinate with your tax advisors on the implications of various contribution amounts and allocation formulas
• Provide annual valuation recordkeeping
• Provide combined testing with Defined Benefit / Cash Balance Plans.

For more information on how Trinity Pension Consultants can help you with a Profit Sharing Plan, call Anthony Warren at 330-869-3747.