A profit sharing plan is a defined contribution plan that is established and maintained by and employer and provides for employee participation in profits. Profit sharing plans can either be contributory or non-contributory. When an employee contributes to the plan it is considered contributory, when an employee does not contribute to the plan it is considered non-contributory.
There are seven types of profit sharing plans: profit sharing plans, stock bonus plans, employer stock option plans, thrift plans, age based plans, new comparability plans, and the most prevalent 401(k) plans. A 401(k) is a cash or deferred arrangement. 401(k)s are mostly contributory. In a 401(k) the employer can contribute up to $51,000. The employee can contribute up to $17,500 until age 50 in which they may contribute up to $23,000. This extra $5,500 is a catch-up provision. An employer can match the employee’s deferral but it is not required. A 401(k) must follow all eligibility and vesting requirements that we learned in chapter three. The employee’s contributions are always considered 100% vested. The employer’s contributions must vest at least as rapidly as the two to six year graduated or three-year cliff. Sometimes profit sharing plans have trouble passing the actual deferral percentage test. A safe harbor 401(k) is a plan that automatically passes the actual deferral percentage test. In order to be considered a safe harbor 401(k) the employer must provide a 3% non-elective contribution to all employees or match the employees contribution 100% up to 3% and 50% of the contribution from 3-5%.
If an employer chooses to contribute to their employees’ profit sharing plans, the contributions must be made by the due date of the company’s income tax return. Another requirement is that the contributions are to be substantial and recurring. This means that the employer cannot contribute to the plan sporadically.
There are seven types of profit sharing plans: profit sharing plans, stock bonus plans, employer stock option plans, thrift plans, age based plans, new comparability plans, and the most prevalent 401(k) plans. A 401(k) is a cash or deferred arrangement. 401(k)s are mostly contributory. In a 401(k) the employer can contribute up to $51,000. The employee can contribute up to $17,500 until age 50 in which they may contribute up to $23,000. This extra $5,500 is a catch-up provision. An employer can match the employee’s deferral but it is not required. A 401(k) must follow all eligibility and vesting requirements that we learned in chapter three. The employee’s contributions are always considered 100% vested. The employer’s contributions must vest at least as rapidly as the two to six year graduated or three-year cliff. Sometimes profit sharing plans have trouble passing the actual deferral percentage test. A safe harbor 401(k) is a plan that automatically passes the actual deferral percentage test. In order to be considered a safe harbor 401(k) the employer must provide a 3% non-elective contribution to all employees or match the employees contribution 100% up to 3% and 50% of the contribution from 3-5%.
If an employer chooses to contribute to their employees’ profit sharing plans, the contributions must be made by the due date of the company’s income tax return. Another requirement is that the contributions are to be substantial and recurring. This means that the employer cannot contribute to the plan sporadically.