401(k) Profit Sharing Plans

Increase Productivity & Incentives with a 401(k) Plan with Profit Sharing

Profit-sharing plans provide multiple contribution options for the employer to reward long-term employees for their contribution to the business and to give them a share of the profits in the business.  

Profit sharing plans are like 401(k) and Traditional IRAs, the assets grow tax deferred. Participants are also able to take a loan, like a 401(k) or 403(b).

Profit-sharing plans also provide the employer flexibility on the contributions, they can increase or decrease contributions or even skip years.

Eligibility to Contribute

Employee eligibility requirements such as age and length of employment are determined by the 401(k)-plan administrator and company when the plan adoption documents are established.

Note: The Profit-sharing plan adoption document or agreement can be edited to update the employee eligibility requirements.

Maximum Annual Contribution

Profit sharing and match: Up to the lesser of 25% of compensation or $61,000 including employee contributions for 2022.

The total combination of employer and employee (salary deferral) contributions may not exceed $61,000 ($67,500 if age 50 or older) for 2022.

Tax-Deductible Contributions

Profit-sharing plan contributions are tax deductible from federal taxable income.

Taxation of Earnings and Withdrawals

Pre-tax 401(k) contributions and earnings are subject to stare and federal income tax, penalties apply if withdrawn before 59 ½ years old.

What type of Investments are allowed in a Profit-sharing plan?

Profit-sharing plans are typically administered by the employer and there is a set mutual fund lineup like the 401(k) or 403(b) plan.  In some circumstances, employees can invest in their company stock or direct the investments inside the plan.

Withdrawal Penalties

The 10% IRS penalty applies on withdrawals if the distribution is before age 59½ unless an exception below applies. You can read more about this in our “Tax Planning” section or visit the IRS website: Retirement Topics Tax on Early Distributions | Internal Revenue Service (irs.gov)

Exceptions:

  • Separation of service in year turning age 55 or older
  • Death
  • Disability
  • Substantially equal periodic payments over life expectancy
  • Qualified military reservist
  • Up to $5,000 for qualified adoption and/or birth expenses

Required Withdrawals (RMD):

Beginning in tax year 2020, the Required Minimum Distributions (RMDs) to start taking qualified distributions or withdrawals changed from age 70½ to age 72 (However, this does not affect participants who turned 70½ on or before 12/31/2019.)

If you are still employed by the employer sponsored retirement plan: 401(k), 403(b), Simple IRA or small-business account then your RMDs may be delayed until the year of retirement.

  1. Keep in mind, some expectations do apply, and we recommend that you meet with your CPA or Tax Advisor.

ERISA Retirement Plan Startup Deadline:

  • For years after 2020, 401(k) plans may be set up by the tax filing deadlines plus extensions.

  • Employee salary deferral contribution(s) must be deducted from participants’ paychecks.

  • Employer contributions or profit sharing may be made by the tax filing date plus allowable extensions.

To learn more about Profit-sharing plans, see the IRS website: Choosing a Retirement Plan: Profit-Sharing Plan | Internal Revenue Service (irs.gov)