What is a profit sharing plan?
The profit sharing plan is generally the most flexible qualified plan that is available. Company contributions to a profit sharing plan are usually made on a discretionary basis. Each year the employer decides the amount, if any, to be contributed to the plan. For tax deduction purposes, the company contribution cannot exceed 25% of the total compensation of all eligible employees.
The contribution is usually allocated to employees in proportion to compensation and may be allocated using a formula that is integrated with Social Security, resulting in larger contributions for higher paid employees.
Age-Weighted Profit Sharing Plans: Profit sharing plans may also use an age-weighted allocation formula that takes into account each employee’s age and compensation. This formula results in a significantly larger allocation of the contribution to eligible employees who are closer to retirement age. Age-weighted profit sharing plans combine the flexibility of a profit sharing plan with the ability of a pension plan to skew benefits in favor of older employees.