| The Profit Sharing Plan is the most flexible qualified plan available. An employer can contribute up to 25% of the total compensation of all eligible employees. The maximum amount which can be allocated to any one participant is 100% of the participant's compensation or $46,000, whichever is less. The $46,000 limit applies for 2008 and is adjusted each year to reflect changes in the cost-of-living index.
The decision to make a contribution to a profit sharing plan is made by the employer each year. It is not necessary to make a contribution every year. Many employers tie the level of contribution to the profitability of the business, but it is not required that the employer show a profit in order to make a contribution.
Advantages
- Contributions are discretionary. This enables an employer to vary contributions from year to year.
- Nonvested account balances forfeited by terminating employees can be reallocated to the accounts of active participants or can be used to reduce future employer contributions.
- A profit sharing plan can be used in combination with another type of plan, such as a Cash Balance Plan, to achieve a higher contribution level.
Possible Disadvantages
A higher maximum contribution level can be achieved with other types of plans such as a Money Purchase Pension Plan or a Defined Benefit Plan.
New Comparability
The purpose of a retirement plan is to provide retirement income. It costs more to provide a specified level of income to an older employee than a younger employee. This is because a younger employee has many more years to invest his or her money.
To take this into account, our tax code allows larger contributions to be made on behalf of older employees. In many businesses, the key executives are older than most of the other employees. The tax code allows a greater contribution to be made for these older key executives.
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