At InSight, we encourage profit sharing as a valuable option within a 401(k) plan, allowing employers to make pre-tax contributions to their employees’ retirement accounts at the end of the year. Contrary to its name, profit sharing doesn’t necessitate that your organization generates profits for the year. Instead, it provides flexibility for rewarding employees with additional retirement contributions based on your discretion.
Why You Should Consider Profit Sharing:
There are numerous advantages to making profit-sharing contributions, including:
- Tax-Deductible Contributions: Profit-sharing contributions are typically tax-deductible for the previous tax year.
- Financial Assessment: You can assess your finances before deciding the amount to contribute.
- No Minimum Requirement: No minimum amount for profit-sharing contributions exists.
- Contribution Limits: While profit-sharing contributions don’t count toward the annual deferral limit, they are limited to 25% of eligible compensation (the deduction limit) for the plan year. Additionally, total contributions per participant can be at most $66,000 ($73,500 with catch-up contributions) for 2023 (the annual additions limit).
- Inclusive Contributions: You can contribute to all employees, even those who don’t personally contribute.
- Vesting Options: Vesting schedules can be chosen to incentivize employee retention.
Please note that if your business is part of a legally related group, you may be obligated to distribute profit sharing across all entities involved.
How to Make Profit-Sharing Contributions:
InSight simplifies the process of implementing profit-sharing plans. If you plan to make a profit-sharing contribution, follow these steps:
- Verify Plan Settings: Ensure that your plan includes the desired profit-sharing allocation formula.
- Formula Options: Pro-rata and flat dollar profit-sharing formulas are available for InSight Core and Enterprise plans. New comparability is also an option for Enterprise plans or can be added for a fee in Core plans.
- Initiate Profit Sharing: InSight will create a profit-sharing task on your administrator dashboard in the first quarter after receiving compensation data. Simply complete this task to initiate profit sharing.
- Confirmation Notice: After your request is submitted, InSight will provide you with a confirmation notice to review before processing the profit-sharing contributions.
For more details on the availability of profit sharing and specific timelines, please refer to our resources.
This guide aims to help plan sponsors navigate the profit-sharing process with ease, providing a valuable benefit to both employers and employees.