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Profit Sharing & Money Purchase Plans

What are Profit Sharing and Money Purchase Plans?

Both profit sharing and money purchase plans are generally trustee directed in pooled accounts.

Profit Sharing Plan

A Profit Sharing Plan is an employer contribution based on an employee’s annual wage. The contribution is made to the plan on behalf of the employee. This contribution is typically done at the end of a plan year after the W-2 wages are known. This is a discretionary contribution where the employer decides the amount of the contribution, if any. Profit Sharing Plans often have a 401(k) feature. The employer also selects the allocation method applied to the contribution; there are four allocations to choose from.

• Salary Proportional (Traditional): All employees receive the same percentage contribution, based on a percentage of pay. For example, if the owner gets 5% of his annual compensation, all other employees get 5% of their annual compensation.
• Permitted Disparity (Integrated): This method can provide a larger benefit to the higher paid employees, which typically are the owners. An integration level is set based on the social security wage base ($106,800 for 2010). Employees earning more than the integration level receive an additional benefit.
• Age Weighted: This method considers the employee’s age and the years of service until retirement. Older employees receive a larger contribution/percentage because they have less time to accumulate their retirement benefit. Age weighted works well when the owners are older than the employees.
• New Comparability/Cross Tested: This method looks at age and compensation and converts the contribution to an equivalent benefit at retirement. The employees are separated into classes; typically the owners/officers in one class and all remaining employees in the other. The definitions for these classes must be reasonable. The company can make a larger contribution to one of the classes, as long as the projected benefit at retirement age does not discriminate in favor of the highly compensated employee class.

Money Purchase Plan

A Money Purchase Plan is similar to a Profit Sharing Plan in that the employer contribution is based on an employee’s wage. The contribution is made to the plan on behalf of the employee. This contribution is typically made at the end of a plan year after the W-2 wages are known. However, this is a MANDATORY CONTRIBUTION. The employer decides the level of the contribution when setting up the plan and must contribute that amount each year. These plans cannot have a 401(k) feature. We work with some of the best recordkeepers in the industry.

Contact Retirement Plan Services

Not sure which retirement plan is the best option for your situation? If so, then contact our retirement plan professionals to determine the best plan options for you. For additional information on our retirement plan services please contact Steve Shearn at 831-759-6300, or click here to email Steve.