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401(k) Profit Sharing

A Profit Sharing Plan is a defined contribution plan in which the employer makes discretionary contributions.  A key advantage is flexibility in determining the annual contribution.

The maximum annual employer deduction for contributions is 25% of eligible compensation.  There is also a maximum individual contribution limit.  The individual limits are adjusted annually for cost-of-living increases.

Key Features

  • Tax-deferred investment
  • Flexibility in plan design
  • Contributions discretionary
  • Contributions may be deductible by employer

 How it Works

In a cross-tested formula, employees are assigned to classification groups based upon ownership or job title.  Each group receives a different percentage of the contribution, subject to nondiscrimination testing.  The advantages are:

  • Allocation percentages favor the owner
  • Discretionary, tax-deductible contributions
  • Availability of life insurance with tax-deductible premiums

Profit Sharing Formula Comparison
Salary Proportion and Cross-Tested 
Scenario:  Business owner age 55, spouse 52;  two employees age 24 and 33



Salary Proportion Formula​Cross-Tested Formula
​Owner & Spouse$67,000$94,000
Employees$10,400  $2,600
Total$77,400$96,600
% to Owner & Spouse87%97%

 Contributions are for illustration purposes only, and actual contributions may vary.  Contributions are calculated based upon individual census data.  Values as of 01/01/2019

Securities offered through ELE Wealth Advisors, Inc., member FINRA. Advisory services offered through ELE Advisory Services, Inc. EWAI and EAS are affiliated through common ownership and control. Financial Wealth Solutions, Inc. and 1st Consumer Insurance Agency Inc. are not affiliated with EWAI or EAS.
FINRA Broker Check https://www.finra.org/compliance-tools/rule-2210-brokercheck

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