A plan sponsor’s guide to profit sharing

Profit sharing is a pre-tax contribution employers can make to their employees’ retirement accounts after the end of the year.

Updated over a week ago

At Guideline, profit sharing in a 401(k) plan is a pre-tax contribution employers can make to their employees’ retirement accounts after the end of the year.

Although the name implies that profit sharing involves profits, your ability to make them does not require that your organization have profits for the year. Instead, profit sharing is up to your discretion and can be a flexible way to reward employees with additional retirement contributions.

Reasons you may wish to consider profit sharing

  • Contributions are tax-deductible, typically for the previous tax year.

  • The ability to assess your finances before deciding whether or how much to contribute.

  • There is no minimum amount for profit sharing contributions.

  • Contributions do not count toward the annual deferral limit, but the total profit sharing contribution plus any other employer contributions made for the plan year is limited to 25% of eligible compensation (the deduction limit). Additionally, total contributions per participant cannot exceed $66,000 ($73,500 including catch-up contributions) for 2023 (the annual additions limit).

  • Allows you to make contributions to all employees, even if they don’t personally contribute.*

  • Vesting schedules may be selected, which can help incentivize employee retention.

Please note, if your business is part of a legally related group, you may be required to contribute profit sharing across all of the entities involved.

How to make profit sharing contributions

Guideline makes the profit sharing process easy for plans to implement. If you intend on making a profit sharing contribution, first check that your plan includes the profit sharing allocation formula you want to use for your plan within Settings.

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Pro rata (also known as comp-to-comp) and flat-dollar profit sharing formulas are available for Guideline Core and Enterprise plans. A new comparability formula is also available for Enterprise plans or for a fee for Core plans.** Profit sharing is not available for Guideline Starter plans.

The profit sharing task

Guideline will publish a Profit Sharing task on your Guideline administrator dashboard in the first quarter after receiving your compensation data (if applicable). To initiate profit sharing, simply complete the task. After your request is submitted, Guideline will provide you with a confirmation notice to review before the profit sharing contributions are processed.

You can learn more about when profit sharing will be available here.

* Profit sharing contributions to participant accounts that previously did not have a balance will increase the amount of monthly maintenance fees charged. Adding profit sharing contributions to a safe harbor 401(k) may result in additional nondiscrimination testing.
** Profit sharing is not available for Starter 401(k) plans. Please visit our pricing page for more information on our plan tiers. See our Form ADV 2A Brochure for more information about our fees.

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