Profit Sharing & Money Purchase Pension Plans
Profit Sharing Plan
Money Purchase Pension Plan
Profit Sharing
Profit Sharing plans let an employer share the success of the company with the employees. When the company is successful, employers can put a share of the profits into the retirement plan. Profit sharing plans are good solutions for employers who don't have a clear profit pattern or who want to vary the percentage of contributions each year.
Profit Sharing plans are the most flexible form of qualified retirement plans currently available. They offer the following characteristics:
- Discretionary contributions
- May be used in combination with other qualified retirement plans
- Can include a 401(k) feature
The Economic Tax Relief Reconciliation Act of 2001 (EGTRRA) has increased the amount that individuals and employers can contribute to a Profit Sharing Plan. To find out how much can be contributed, visit our plan limits page. To find out more about changes brought on by EGTRRA, visit our EGTRRA page.
Benefits of a Profit Sharing Plan
- The full amount of the annual contribution (up to legal limits) is tax deductible on the federal level, and in most instances, on a state basis as well.
- The costs of maintaining the plan are tax deductible as business expenses.
- Company contributions to qualified plans can be delayed until filing of the company's tax return, plus extensions.
- Enhances competitiveness in recruiting and retaining employees.
- Improves employee morale and productivity.
- Protects plan assets from creditors.
- Contributions are not taxed as income until they are withdrawn.
- Earnings on all contributions accumulate tax deferred until they are withdrawn.
- Employee distributions may qualify for beneficial tax treatment.
View the deferral limits for the Profit Sharing Plan by visiting our Plan Limits page.
Money Purchase Pension Plan
A money purchase pension plan works well for businesses with a clearly defined cash flow. It requires a set contribution rate that an employer selects at the time a plan is established. The employer must subsequently contribute this fixed percentage of each participant's compensation regardless of the level of profits. Money purchase pension plans do not offer the flexibility of profit sharing plans.
Features & Benefits of a Money Purchase Pension Plan
- Employer contributions are tax deductible.
- Contributions and plan earnings are tax deferred for the participant.
- The contribution percentage, as stated in the adoption agreement, is a required contribution each year.
- Different vesting schedules are available. As a result, employers can offset future contributions with forfeited balances.
- Employees can withdraw from their account for special purposes.
The Economic Tax Relief Reconciliation Act of 2001 (EGTRRA) has increased the amount that individuals and employers can contribute to a Money Purchase Pension plan. To find out how much can be contributed, visit our plan limits page. To find out more about changes brought on by EGTRRA, visit our EGTRRA page.
