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Does a profit sharing 401(k) make sense for you


A profit sharing 401(k) offers tax benefits, rewards employees, and offers flexibility on how much to award based on the success of your business each year. There are three common reasons owners choose a profit-sharing 401(k):

  1. The business does not currently have a 401(k), has a direct need to lower taxes for the current year, and has missed the end of Q3 Safe Harbor deadline.
  2. A company has a cyclical business where profits vary widely from year to year.
  3. The firm wants added flexibility to reward employees more for exceeding business goals.

Employer contributions to a profit sharing plan are discretionary and can even be $0 in tough years, although contributions are allowed even when the business doesn’t make a profit.

There are a couple other important things to note when considering a profit-sharing 401(k) plan:

  • There is no personal deferral contribution by employees for profit sharing; it all comes from the company.
  • Profit sharing can be given on a whole dollar amount where everyone gets the same, a salary percentage, or on a social security integrated basis (call us for an explanation if interested in this option). The maximum amount an employee can receive is $49,000 ($54,500 if 50+ years of age).
  • The plan must be established in the current tax year, but contributions do not need to be made until the final federal return is filed for your business (e.g. setup prior to December 31, 2009 and contribute before April 15, 2010 for calendar tax year).
  • If you don’t have a 401(k) plan and have an urgent need to shelter money from taxes this year, you can do so with a profit-sharing only 401(k). You can also request to have your plan amended to a more traditional or safe harbor plan for the next and on-going years.

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