Profit Sharing Plan
The profit sharing plan is one of the most flexible qualified plans available. Every year, the company can decide the amount of contributions, if any, to be made up to the maximum limit. This flexibility is particularly valuable to companies that would like to contribute in profitable years but not in unprofitable years.
A profit sharing plan allows an employer to make annual contributions of up to 25% of eligible payroll (the total salary of those who meet the participation requirements of the plan).
A profit sharing plan must provide an allocation formula as part of the plan document. The allocation formula determines how the profit sharing contributions will be allocated to participants. Allocations to participants are limited to the lesser of 100% of compensation or $58,000 (2021 - indexed).
In 2002, the deductible contribution for profit sharing plans was increased from 15% of eligible payroll to 25% of eligible payroll, the same as other defined contribution plans. Profit sharing plans are now the defined contribution plan of choice.