401(k) Profit-Sharing Plan

Profit-sharing is a feature that can be added to a normal 401(k) plan to help your employees save for retirement.

Profit-Sharing Benefits Employers and Employees

Employers can decide annually whether to contribute to employee plans depending on their company revenue that year. Employees can receive a profit-sharing contribution from employers even if they do not make a contribution themselves.

How Profit-Sharing Works

• Profit-sharing is typically offered as a 401(k) plan feature.
• Employees do not have to make contributions to their own plans, though adding a salary deferral option would convert the plan into a 401(k).
• Unlike a Safe Harbor 401(k), employers are not mandated to make contributions every year and the profit share can be subject to a vesting schedule (up to a three-year cliff or six-year graded).
• Employees can take out loans from their profit-sharing plans or roll over the money into an IRA when leaving the company. Like a 401(k), distributions taken before age 59.5 are subject to a 10% penalty.

Benefits of Profit-Sharing for Employers

Employers like profit-sharing plans because:

They can better control 401(k) costs.

• The flexible contributions are an excellent choice for start-ups, erratic industries, or companies that frequently acquire other businesses. Many employers like having the ability to do what makes sense from year to year without being locked into a potentially costly formula. Employers that are set up as S Corps or Partnerships have until the March 2023 tax filing deadline to decide on their contributions unless extended until September, while deducting them on the 2024 tax return. Sole proprietors and Corporations have until April to file, unless extended until October.

Profit-sharing attracts, rewards, and retains talent.

• Profit-sharing plans can add 4-5% to an employee’s salary, which works well to attract and retain workers. Highly Compensated Employees (HCEs) can receive more generous contributions, subject to additional IRS nondiscrimination testing. A vesting schedule determines how long an employee must work for the company before they own 100% of the employer contributions, which is helpful for employee retention and cost savings.

Tax liability can be reduced with profit-sharing.

• Like any other type of 401(k), contributions are tax-deductible for employers and not subject to Social Security or Medicare withholding. Likewise, these contributions increase the employee’s retirement savings without increasing their taxable income for the year. In a good year, businesses can make the highest possible contributions and get the highest possible write-off.

Benefits of Profit-Sharing for Employees

Employees like profit-sharing because:

They receive more money for retirement.

• Nearly half of Americans fear they will not have enough money to maintain a comfortable lifestyle in retirement. Employers make it easy to save.

They get something for free.

• Employees do not have to contribute to the plan in order to receive the profit share. Even low earners can obtain this base retirement benefit.

Profit-Sharing Rules and Limits

No matter which formula is used, all 401(k) profit-sharing plans are subject to the following IRS rules:

Contribution Limits:

• In 2025, employers may put in the lesser of $70,000 per individual, not exceeding 25% of eligible plan compensation.

Tax Deduction Limits:

• Employers can deduct contributions up to 25% of eligible plan compensation on their taxes.

Calculations:

• Annual employer/employee contribution and testing calculations cannot use compensation in excess of $350,000 (2025 limit, may change annually) or 100% of salary.

Notices:

• Employers are not required to supply notices when the contribution is not required.

Forms:

• Form 5500 must be filed with the Department of Labor annually.

Funding Deadline:

• Partnership, LLC partnership and S-Corporation – March 16th (September 15th with extension)
• C-corporation & Sole proprietor – April 15th (October 15th with extension)
• Tax-exempt organization – May 15th (November 16th with extension)

Common Profit-Sharing Formulas

Employers can choose from a number of profit-sharing formulas:

Pro-Rata:

• Pro-rata plans are most common, allowing everybody to receive contributions at the same uniform rate. Like the employer match, employees receive a set percentage of their compensation as a profit share. The comp-to-comp formula allows employers to offer a benefit that is easy for employees to understand.

New Comparability:

• Cross-testing or new comparability profit-sharing generally offers maximum flexibility for employers to make contributions at different rates. This method uses a complex set of testing methods to cross test different sets of criteria such as compensation, age, and highly compensated employee status. New comparability profit-sharing may be appropriate for businesses with fewer than 50 employees when owners are older, more highly compensated, and wish to hit their maximums.

Combining Profit Shares with 401(k)s

In most cases, profit shares are offered in conjunction with a 401(k), allowing employees to contribute their own money–up to $31,000 annually with standard catch-up contributions for those 50 and older, or up to $34,750 with the SECURE 2.0 Act's super catch-up contributions for individuals aged 60 to 63–while employers can contribute up to the $70,000 maximum. Combining both features creates flexibility for employee bonus structures while allowing employees and employers to save more for the future.

Starting a new 401(k) plan with profit-sharing requires a system that tracks contributions, investments, distributions, and IRS compliance. Ongoing administrative upkeep is typically outsourced to a Third-Party Administrator such as Ubiquity.

Setting up a profit-sharing plan as part of an existing 401(k) can be done by simply adding an amendment. As a 401(k) plan administrator, Ubiquity consults with clients to make sure the profit share aligns with business goals.

Profit-sharing is a generous incentive to encourage workers of all compensation levels to continue providing their best efforts while allowing maximum flexibility for employers to keep costs reasonable. Contact Ubiquity to learn more about profit-sharing benefits.

If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans, plus expert guidance along the way.

We will fully customize your plan to meet the specific needs of your small business.

Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to retirement experts in addition to industry-leading, low, flat fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.

Reasons Not to Offer Profit-Sharing?

Profit-sharing is generally a worthwhile benefit, though it may not be right for every company due to the following factors:

• The plan requires some thought each year to determine whether to offer the benefit and how much.
• Employees may view the contribution as less certain than cash incentives.
• When the company skips years of profit-sharing, there is no incentive for company loyalty.