Profit Sharing Plans

Offering a profit sharing plan to your employees is a great way to contribute to their retirement
By Leah Kuriluk Profit sharing plans are a type of retirement plan in which the company is the sole contributor. As a business owner, you can choose how much or how little to contribute to your profit sharing retirement plan each year. In fact, you don't have to contribute any money at all if you don't want to. This allows you some flexibility in case of a bad year. Contributions to the profit sharing plan are tax deductible too, all the way up to 25% of compensation. The employee gradually gains ownership over contributions made on his behalf to profit sharing plans.
 

In order for your employees to qualify for a profit sharing retirement plan, they must not belong to a union and must be permanent residents or legal aliens. To start a profit sharing plan a company must be a sole proprietorship, partnership, or limited liability corporation and must file before December 31 of that fiscal year.

Before deciding to start a deferred profit sharing plan you should decide the following:

1. How long employees will have to work for your company before they become eligible for the profit sharing pension plan.

2. Establish a contribution schedule. For example, a 0% contribution the first year and 20% each year after that.

3. Plan out eligibility requirements for your company profit sharing. These can be less restrictive than the government's requirements, but not more.

Ask financial companies where they're investing the money you contribute to profit sharing

It's important to know what kind of return and investment opportunities are available for your profit sharing pension plan and what's being done to make your returns safe and profitable. Ask each company exactly how they approach investing your money in the profit sharing plan.
Try: Check out Wells Fargo's sample profit sharing plans to see which investments they make. State Farm and Charles Schwab have information on profit sharing plans for small businesses.

Consider a 401k profit sharing plan

This plan is a version of a traditional profit sharing plan, but includes a 401k as well. An employee can choose to have his 401k profits added to his profit sharing plan. This type of plan is great for a company that wants its employees to be able to contribute, too.
Try: Download a white paper from Shareholder to see a couple of different takes on a 401k profit sharing plan and common options available. They include sample profit sharing plans.

File a form 5500 each year with the IRS (Internal Revenue Service).

This is an annual report on your profit sharing retirement plan, detailing how much was contributed to each of its recipients.
Try: The US Department of Labor allows you to download form 5500 for your qualified profit sharing plans and offers a brief overview. For tips on filing your 5500 form, check out the IRS filing website on a profit sharing plan and the 5500 form.

• Profit sharing plans for small businesses are a great way to attract new or valuable employees while still providing the flexibility needed to help a small business get by.