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Employer Discretionary Profit Sharing Contributions
A discretionary profit sharing contribution provides the employer with an opportunity to reward employees by allowing the company to make additional employer contributions to employee retirement accounts. A profit sharing contribution can be made on top of any other employer contributions for the year, and can be offset by any prevailing wage fringe contributions already contributed to the plan. It is not contingent on the company’s showing a profit for the year, nor on an individual employee’s making voluntary employee deferral contributions.
Profit sharing is flexible. Like the discretionary matching feature, the employer has the option to put a vesting schedule on discretionary profit sharing contributions, as well as additional allocation requirements. More than that, this feature gives the employer the option to make an additional contribution, but does not require them to do so.
Many employers will wait until February or March before deciding if they want to contribute, and how much they want to contribute, to participant accounts for the year that just ended. As long as the contribution is made by the time the company’s corporate tax return is filed, it counts as a deductible contribution for that previous year. The contribution can be given to all individuals at the same level (for example, every employee gets X% of their compensation), or the provision can be used to target larger contributions to owners and other high earners. Our team can help you model a profit sharing strategy to meet your needs.