Profit Sharing Plans
Guess what. You don’t need profits in order to make contributions to a profit-sharing plan. Of course, having a profit would probably make it easier to actually contribute something.
Contributions to a profit-sharing plan are discretionary. There is no set amount that you need to make. If you can afford to make some amount of contributions to the plan, then go ahead.
If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee.
Highlights of Profit Sharing Plans
- Can be set up by any employer
- Participant’s retirement benefits based upon participant’s account balance
- Can include a feature allowing employees to contribute to their own retirement through salary deferrals, up to $16,500 and an additional $5,500 if age 50 or older
- The employer can decide each year whether and how much to contribute
- The maximum annual contributions are the lesser of 25% of an employee’s compensation or $49,000 or more if catch-up contributions
- May exclude certain employees provided annual coverage tests are met
- More complex to set up and operate
- Annual return usually required
- Must usually satisfy annual nondiscrimination testing
- Greater design flexibility
- Plan may allow loans and hardship withdrawals
- May delay vesting of employer contributions
As with 401(k) plans, you can make a profit-sharing plan as simple or as complex as you want to.
Who Contributes: Employer contributions only.
Contribution Limits: The lesser of 25% of compensation or $49,000 in 2010 and 2011
Filing Requirements: Annual filing of Form 5500 is required.
Participant Loans: Permitted.
In-Service Withdrawals: Yes, but subject to possible 10% penalty if under age 59-1/2.
**Source: http://www.irs.gov/retirement/article/0,,id=108948,00.html
