What Is 401(K) Profit Sharing?

When considering the right retirement plan for your business, it’s essential to explore all your options. You may already offer your employees a 401(k) retirement plan, however, a 401(k) with a profit-sharing option might just take employee satisfaction and retention to new heights.

The basics of 401(k) profit sharing

A 401(k) profit sharing plan allows an employer to set aside a certain monetary contribution to the employee’s 401(k) based on their profits. However, there are limitations to these employer contributions. According to the IRS, these additions cannot exceed $66,000 ($73,500 including catch-up contributions) for 2023 and $61,000 ($67,500 including catch-up contributions) for 2022. Furthermore, an employer’s contribution cannot be more than 25% of the annual compensation during the plan’s fiscal year.

Benefits of 401(k) profit sharing

Though some employers may question whether they can afford to implement 401(k) profit sharing, there are plenty of reasons to take advantage of this option for both the employer and the employee.

Attractive benefit to retain employees

With an ever-changing economy, job seekers are prioritizing retirement benefits. 401(k) options are becoming one of the most important topics on their minds during the interview process. Access to a retirement account may ultimately affect whether they choose to remain in a position or accept a new opportunity.

Business tax break

Providing your employees with 401(K) profit sharing options is a great way to boost company morale and incentivize them to work more productively. Thanks to the passing of Secure Act 2.0, businesses and their employees can now gain additional benefits and incentives associated with their 401(k). Employers who have 50 or less employees may be eligible for a tax break of 100% of the admin cost of creating a company 401(k) plan. Additionally, businesses with up to 100 employees may receive a tax credit based on their employee matching or profit-sharing contributions.

A flexible option

401(k) profit-sharing allows businesses the opportunity to wait until the end of the year to decide whether they want to provide their employees with this option. However, contributions must be made before the next tax filing deadline. In addition, your contribution is still deductible on the previous year’s tax return.

Personalized vesting schedule

When offering a 401(k) profit-sharing plan, you can choose your vesting schedule based on the employee’s length of employment. This can encourage employee retention because the longer they stay with the company, the more vested employee contributions they stand to gain. If an employee leaves the company before the employers’ funds are fully vested, the employee will forfeit their access to the unvested portion.

How to enroll in 401(K) profit sharing

The process of enrolling your company in a compliant profit-sharing plan involves four steps:

1. Create a written plan document.

2. Arrange a company trust for the plan’s assets

3. Establish a record-keeping system

4. Inform your eligible employees of the new plan.

While this process may seem overwhelming, ePlan takes the guesswork out of 401(k) enrollment. Are you interested in 401(k) profit-sharing plans? Contact our team today for a free quote.

This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.