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Enjoy Tax Deductions & Retirement Savings With a Profit Sharing Retirement Plan

Profit sharing plans have long been a popular retirement plan choice for small businesses. With these plans, the employer makes discretionary contributions and a key advantage is flexibility in determining the annual contribution amount depending on business profitability. The maximum annual employer deduction for contributions is 25 percent of eligible compensation. There is also a maximum individual contribution limit. The individual limits are adjusted for cost-of-living increases.

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Added Flexibility With a Cross-Tested Formula for Your Profit Sharing Plan

In a traditional profit Sharing plan, typically owners and employees share the same percentage of their salary for the contribution. However, using either a cross-tested or age-weighted formula provides owners with more options in how the contribution amount is divided among employees based on objective criteria. For example, the owner may divide employees by job classifications and ownership or by age, subject to nondiscrimination testing.  

The business owner may prefer that not everyone receive the same share. Age-weighted formulas allow higher contributions for older employees who are closer to retirement age. Two or three groups may be created with each group receiving a different allocation. The objective of the owner is of primary importance. The options available under these plans are significant.

Advantages of a Profit Sharing Plan for Your Business

  • Discretionary, tax deductible employer contributions
  • Allocation flexibility with percentage favoring the owner
  • Generally more favorable if the owner or key employees are older than most employees
  • Availability of life insurance with tax-deductible premiums
  • Can help attract and retain employees

Points to Consider About a Profit Sharing Plan

  • Owner allocations impacted by employee demographics
  • Retirement benefits are impacted by investment returns
profit sharing plan

What You Need to Know About a Profit Sharing Plan

Read through our information guide to get all the details about a Profit Sharing Plan. 

Profit Sharing Plan Information Guide (PDF)

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IMPORTANT DISCLOSURES
The Lafayette Life Insurance Company does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Lafayette Life cannot guarantee that the information herein is accurate, complete, or timely Lafayette Life makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.

The Lafayette Life Insurance Company provides services to pension plans as outlined in a separate Administrative Services Agreement, and issues life insurance and annuity products that may be used as funding options. This material is for informational purposes only. Lafayette Life does not serve as plan administrator or fiduciary, nor does Lafayette Life or its representatives provide ERISA, legal or tax advice. Your personal or legal tax advisors should always be consulted and relied upon for advice.

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