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Profit Sharing Plans

For employers requiring flexibility, contributions to a Profit Sharing Plan are discretionary. You choose when and if you want to contribute to the plan. Employers can set the employee eligibility requirements to make the plan available to more or fewer employers, subject to IRS rules.

Employees may also contribute to a profit sharing plan to generate additional retirement benefits.

Contributions, in general, can be allocated to participants in four different ways:




Every employee receives the same percentage of covered compensation.




Employees who have earnings exceeding, typically, the social security wage base receive extra benefits on their earnings over the social security wage base. For example, employees could receive a contribution of 3% of earnings up to the social security wage base, plus 6% of earnings exceeding the social security wage base.




Allocates greater contributions to older, higher-paid employees based on annuity factors at retirement.




Allocates greater contributions to specific classifications of employees, such as lawyers versus non-lawyers in a law firm or physicians versus non-physicians in a medical practice. This method requires special annual testing to ensure that the contribution allocation does not discriminate against lower-paid employees.

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