PROFIT SHARING PLANS
Retirement Plans –> DB Plans — Cash Balance Plans — Profit Sharing Plans — 401(k) Plans — 403(b) Plans — Retiree Medical
PROFIT SHARING, money purchase, and other types of defined contribution (DC) plans can take the form of IRS pre-approved designs, or other designs that meet the employer’s objectives while still complying with IRS rules.
Pre-approved methods of allocating employer contributions include:
- a level percentage of pay for each employee, and
- an “integrated” plan that takes the employer’s FICA taxes into account by allocating an additional contribution for pay above the Social Security wage base.
Many other designs are possible when pre-approved plans aren’t good enough. Two examples are shown here:
- A service-weighted plan that contributes a higher percentage of pay for each year an employee stays with the company. Service-Weighted plan allocates 1% of pay per year of service.
- A “class allocation” plan that enables highly paid employees to defer more of their compensation while other employees take most of their compensation in cash. Class Allocation plan allocates 20% of pay for owner, 5% for employees.
Both of these examples are “cross-tested” plans, named after the IRS “cross-testing” process of converting contributions into benefits for nondiscrimination testing.
|
Age |
Years of Service | Pay | Service-Weighted | Class Allocation | |||
|
Contribution |
% of Pay | Contribution |
% of Pay |
||||
|
Owner |
55 | 20 | $250,000 | $50,000 | 20.0% | $50,000 | 20.0% |
|
Employee |
40 | 10 | 50,000 | 5,000 | 10.0% | 2,500 |
5.0% |
|
Employee |
30 | 5 | 30,000 | 1,500 | 5.0% | 1,500 |
5.0% |
|
Total |
$330,000 | $56,500 | 17.1% | $54,000 |
16.4% |
||
You can follow current defined contribution topics on the DC plan section of our blog.
© 2012 Northern Consulting Actuaries, Inc. dba Van Iwaarden Associates.
