Profit Sharing Plans
These are programs for Employers that want to provide a company pay all retirement plan for its
employees. These plans are more flexible than Pension Plans, because Employers are not
committed to a fixed contribution each year. Contributions can range from nothing in some years
up to 25% of eligible payroll. The maximum annual addition to a participants account can be
25% of pay not to exceed $40,000. The maximum salary that can be used for these calculations,
for individual participants, as of 2002 is $200,000 (indexed for the cost of living).
There is no minimum number of employees required to sponsor a Profit Sharing Plan. Plans
generally cover all employees that have worked for the Employer for a year. However, plans can
be designed to cover certain employer groups and not others.
There are four popular kinds of Profit Sharing Plans
1.
2.
3.
4.
Traditional Profit Sharing Plan
Integrated Profit Sharing Plan
Age Weighted Profit Sharing Plan
New Comparability or Tiered Profit Sharing Plan
1. Traditional Profit Sharing Plans
In this type of plan the company contribution is generally allocated among eligible
participants as a percentage based on each participants compensation that is in ratio to
the total compensation of all eligible employees, otherwise known as a prorata
allocation. There are other formulas available such as allocating based on age and
years of service. Some programs simply give everyone the same dollar amount.
2. Integrated Profit Sharing Plans
Similar to the Traditional plan, however, the allocation formula favors participants
that exceed the social security wage base. The reason this plan is very popular is
because people that earn more that the social security wage are limited to what social
security will provide. Since higher paid employees are in a sense discriminated
against, the company plan can supplement by giving those employees more benefits.
3. Age Weighted Profit Sharing Plans
These plans provide higher allocations to participants that are closer to retirement.
4. New Comparability or Tiered Profit Sharing Plans
These plans are also called Super Integrated Plans. The plan establishes tiers or
groups of participants. Each tier or group can have a different allocation formula. It is
possible for the highest tier to obtain 25% of pay and the lowest tier 5% of pay. In
order to have this kind of plan you must pass certain non-discrimination tests each
year. The test will dictate the percentage contribution for each tier.
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