Profit Sharing Plan
A profit sharing plan allows you to give a share of your business profits to your employees. With this plan, your employees are able to save for retirement while giving you the flexibility to design the plan features. This plan is a great way for you to share business profits with your employees, which benefits everyone.
Here are a few reasons why a profit sharing plan may benefit you:
Profit sharing plans are very flexible in terms of employer contributions.
By adding a profit sharing plan to a traditional 401(k), the business owner can save up to $58,000 per year (in 2021) in personal retirement savings.
Profit sharing is a feature that can be easily added to any 401(k) plan.
Contributions to a 401(k) plan with profit sharing are a deductible business expense and earnings on the contributions grow tax-deferred for your employees.
Employees view a profit sharing contribution to their 401(k) as employer dollars helping them achieve their retirement goals.
There are four types of plans you can apply to your 401(k):
Pro-Rata: Employees get the same amount, determined by the employer each year. The amount is based on a percent of salary.
Integrated: Allow an employer to contribute different amounts to employees based on their Social Security tax levels.
Age-Weighted: The contribution amount is determined based on the age of the employee, and older employees receive more.
Flexible: Cross Testing allows you to create multiple benefit groups with their own contribution rates.
Cash Balance Plan
The U.S. Department of Labor acknowledges two general retirement plans called defined benefit plans and defined contribution plans. A Cash Balance Plan is often called a "hybrid" plan because it is a defined benefit plan that contains some aspects of a defined contribution plan.
With a Cash Balance plan, you are able to credit your employees account with a set percentage of their annual salary as well as interest charges. This plan is a defined-benefit plan where finding limits and investment risk are reliant on defined-benefit requirements.
There are a couple things you should take into consideration before establishing a cash balance plan:
- Contributions: A cash balance plan requires annual contribution credits. These credits cannot be modified from year to year. Before establishing a cash balance plan, you should ensure that you can commit to this requirement.
- Cost: A cash balance plan requires ongoing actuarial work, therefore is costlier to provide than a 401(k) profit sharing plan.
- Complexity: A cash balance plan requires more sophisticated administrative work than a 401(k) profit sharing plan, along with its extra costs.
Ideal situations for a cash balance plan are:
- You or your business partners want to significantly increase your rate of retirement savings
- Your business consistently produces steady revenue
- Your company has fewer than 15 employees per one owner
- You already fund an employer contribution of 5% or more of employee compensation or are interested in doing so. This could include a Profit Sharing Plan or Safe Harbor 401(k).