A profit sharing 401(k) plan lets employers put aside a portion of their profits each year to contribute to employee's 401(k)s. This lets them exceed the employer match limit, but they are also allowed to contribute less. They can contribute a maximum of $56,000 or 100% of the employee's salary, whichever is lower.
401(k) Profit Sharing Plan Rules FAQs
A 401(k) Profit Sharing Plan is a type of employer-sponsored retirement plan that allows an employer to contribute additional funds, above the normal contribution limits, to their employees’ accounts after they have met certain requirements.
Any employee who meets the minimum age and service requirements set by the employer can be eligible to participate in a 401(k) Profit Sharing Plan.
The main rules associated with using a 401(k) Profit Sharing Plan include the employer must make contributions to all employees who meet the eligibility requirements, and contributions must be based on a predetermined percentage of each employee’s compensation.
Participants in a 401(k) Profit Sharing Plan can benefit from reduced taxes: contributions and any earnings generated by the contributions may not be taxed until withdrawn.
An employer should assess their company objectives and budget when deciding which type of plan will best suit their needs. It is important to consider factors such as ease of administration, contribution flexibility, and investment options. Employers should also seek advice from a qualified retirement plan provider or financial advisor in order to make an informed decision.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
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