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
% 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