Small Business Retirement Savings Advisor

Profit Sharing

Profit Sharing Plans depend on contributions from employers, who agree to share a percentage of profits with employees. These plans may permit contributions from eligible employees as well.

An employer does not have to make contributions out of net profits to have a Profit Sharing Plan. The plan must provide a definite formula for allocating the contribution among the participants, and for distributing the accumulated funds to the employees after they reach a certain age, after a fixed number of years, or upon certain other occurrences. The plan need not provide a definite formula for figuring the profits to be shared. But, if there is no formula, there must be systematic and substantial contributions.

In general, you can be more flexible in making contributions to a Profit Sharing Plan than to a Defined Benefit Plan. But the maximum deductible contribution may be less under a Profit Sharing Plan.

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