Deferred Compensation, Part VII: Profit-Sharing
Posted by fhalestewart on February 13, 2018
Adding a profit-sharing component to your 401(k) plan can increase your contributions while also motivating employees. All of the previously-discussed rules apply: you can’t have a top-heavy plan, you can’t discriminate in favor of certain employees, etc…
Here’s a general description of what’s involved from the code:
A profit-sharing plan is a plan established and maintained by an employer to provide for the participation in his profits by his employees or their beneficiaries. The plan must provide a definite predetermined formula for allocating the contributions made to the plan among the participants and for distributing the funds accumulated under the plan after a fixed number of years, the attainment of a stated age, or upon the prior occurrence of some event such as layoff, illness, disability, retirement, death, or severance of employment. A formula for allocating the contributions among the participants is definite if, for example, it provides for an allocation in proportion to the basic compensation of each participant.
The best part is the company is not required to make contributions every year; they can also determine the total amount of their contribution in the first quarter of the year, after sitting down with their accountant and getting a good idea for the previous year’s performance.
The total contribution is limited to the lesser of 25% of compensation or $55,000 (for 2018; $54,000 for 2017, subject to cost-of-living adjustments for later years).
In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program. He is the author of three books: U.S. Captive Insurance Law, Captive Insurance in Plain English and The Lifetime Income Security Solution. He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog. He is also an investment adviser with Thompson Creek Wealth Advisors.
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