Profit-sharing plans
Small-business retirement plans

Profit-sharing plans

A profit-sharing plan allows the employer to decide, within limits, from year to year whether to contribute on behalf of participants. Employers of any size can implement a profit-sharing plan.

In a year when the employer does make a contribution, there needs to be a set formula for determining how the contributions are divided. This money is accounted for separately for each employee. Employer contributions to the plan can be subject to a vesting schedule that requires a set time period to elapse before employees can own them. Once vested, the employer contributions can’t be forfeited.

There’s an annual testing requirement to ensure benefits for rank-and-file employees are proportional to benefits for the owners and managers of the firm.

In establishing a profit-sharing plan for the company, the employer has some flexibility in choosing some of the plan’s features — such as when and which employees can participate in the plan. Other plan features are required by law, such as how contributions are deposited in the plan.

Unless it includes a 401(k) cash or deferred feature, a profit-sharing plan usually does not allow employees to contribute.