Profit Sharing & Profit Sharing Plans FAQs

Profit Sharing and Money Purchase Pension plans are two common types of defined contribution plans. They permit employers to make tax deductible contributions on behalf of themselves and their employees; employee salary deferrals are not allowed.

These plans are a good choice for businesses wanting more features and flexibility in the retirement benefit they provide for their employees. For example, both plans allow for loans and graded vesting, two features not available with SEP IRAs.

What do we do for your plan?
What are the differences between a Profit Sharing plan and a Money Purchase Pension plan?
How are these plans alike?
What are the benefits of offering these plans?

What do we do for your plan?

Our services include:

Trustee services (including IRS Form 1099-R)
IRS approved prototype documents
Notice of required minimum distributions and free calculation upon request
Toll-free number for customer service
Optional Form 5500 preparation and other compliance services

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What are the differences between a Profit Sharing plan and a Money Purchase Pension plan?

Profit Sharing: A Profit Sharing plan is a flexible solution available to business owners for rewarding and retaining employees.

Profit sharing plans can be used to fund employee retirement plans. Because they are the most flexible form of qualified retirement plans available, profit sharing plans can be a good solution for employers whose profit patterns vary from year to year.

An employer can allocate to each participant's account up to the lesser of 100% of annual compensation (capped at $245,000^[1]) or $49,000^[2].
The contribution percentage is flexible. The employer can vary the rate of contribution from year to year or make no contribution at all.
The employer can deduct up to 25% of participating payroll.

Money Purchase Pension: With this plan, the employer contributes a fixed percentage of each participant's compensation regardless of profits.

An employer can allocate to each participant's account up to the lesser of 100% of annual compensation (capped at $245,000^[1]) or $49,000^[2].
The contribution percentage is as stated on the adoption agreement. The employer is then required to contribute this percentage each year.
The employer can deduct up to 25% of participating payroll.

^[1]: $245,000 is the annual compensation cap for 2009.
^[2]: $49,000 is the annual contribution limit for 2009.

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How are these plans alike?

Plans are funded with employer contributions to all eligible employees.
Contributions for both plans are deducted from the employer's income and are tax-deferred for employees.
Contributions can be made up to the employer's tax-filing deadline including extensions.
Plans must be established by the last day of the employer's tax year.
A variety of vesting schedules are available.
Loans and life insurance are available.

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What are the benefits of offering these plans?

Retirement plans are an important part of the benefit package to attract and retain good employees. They can help improve employee productivity and morale.
The costs of maintaining the plans are tax deductible as business expenses.
The full amount of the annual contribution (up to legal limits) is tax deductible on the employer's federal income tax return.

Caution: A SEP-IRA established with the IRS model form cannot be paired with a defined contribution plan.

Note: This information should not be construed as providing individual tax or legal advice. Please consult with your own tax advisor or attorney regarding your individual situation.

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