At this time of year, many employers are considering non-discretionary profit-sharing contributions to employee 401(k) accounts.
These are defined contribution plans allowing additional compensation to all eligible employees in the form of an employer 401(k) contribution. An employer may decide each year whether there will be a contribution and, if so, how much will be contributed (out of company profits or other assets).
An employer’s contributions to the profit-sharing plan are generally tax deductible on a business’- federal income tax return for the year in which they are made.
Once a total contribution amount for the profit sharing contribution has been designated, your plan administrator (BCN uses Slavic Investments) will assist the employer in selecting a method of profit-sharing. There are three commonly used contribution formulas:
- Traditional Method – Each 401(k) participant receives a proportional allocation based on eligible compensation.
- Age-Weighted Allocation Method – Allows the employer to allocate a contribution based on the compensation and age of eligible employees. This method greatly benefits participants that are older and closer to retirement.
- New Comparability Allocation Method – Allows the employer to divide the employees into specific groups and allocate the contribution differently to each group (compliance testing is required).
BCN Services has experts to help you set up a 401(k) and handle other human resources needs for your business. If you have questions or are interested in learning more about 401(k) profit sharing, please call us at 1-800-891-9911 or contact us here.