Types of Profit Sharing Plans
Standard Profit Sharing Plan - A standard profit sharing plan will either have an integrated or non-integrated allocation formula. A non-integrated profit sharing plan will allocate the contribution as an equal percentage to all employees (i.e. 5%) based on compensation. An integrated profit sharing plan will allow employees who exceed the Social Security Wage Base to have the contribution weighted in their favor.
401(k) Plans - A 401(k) plan, also referred to as a "cash or deferred arrangement" (CODA) or "salary reduction plan", is an arrangement under which an eligible employee may elect to have a portion of his or her salary withheld from their paycheck and deposited directly into the company's retirement plan. The tax-sheltered aspect of the 401(k) plan makes it an ideal vehicle for an individual’s retirement savings objectives. The employee has the opportunity to contribute to the plan while reducing current state and federal income taxes. 401(k) plans can stand-alone or be a feature of a profit sharing plan, allowing the employer a discretionary option to contribute on an annual basis.
New Comparability/Rate Group Plans - This plan design allows the employer to target a specific group of employees. The plan separates employees based on their “classification”, making it possible to weigh the contribution in favor of a specific group (i.e. owners or managers). Employers who want to allocate a large portion of the annual contribution to a distinct group of employees may accomplish this through a New Comparability plan.
Age-Weighted Plans - Age-weighted plans use compensation and the participant's age when allocating the contribution. This formula results in a significantly larger allocation of the contribution to employees who are closer to retirement age. Age-weighted profit sharing plans combine the flexibility of a profit sharing plan with the ability of a pension plan to skew benefits in favor of older employees. Age-weighted plans allow employers who have fewer years left until retirement to accumulate sufficient funds.
View Profit Sharing Allocation Comparison Chart (PDF)