Combined 401(k) Profit Sharing Plan

 

A 401(k) profit sharing plan may have a number of contribution sources. The most popular are:

 

Salary Reduction (Elective Deferral)
Eligible employees reduce their income through a salary reduction. This salary reduction is contributed to the employees account in the 401 (k) Profit Sharing plan. These contributions and account values are always 100% vested to the employee.

 

Employer Match (Matching Contributions)
The employer matches employees' salary reductions on some formula basis (i.e., 50% up to 5% of pay). The match can be discretionary and be determined by the employer each year. This employer contribution may be subject to a vesting schedule of up to six years.

 

Profit Sharing Contribution (Discretionary Contributions)
The employer may make additional contributions to the plan which are determined each year by the employer. If a contribution is made, it is allocated to eligible plan participants based on an "allocation formula". Certain formulas, such as age-weighted, integrated and new comparability formulas favor owners, highly compensated and key employees without being discriminatory. These contribution sources are subject to a number of individual, combined and overall limitations as outlined below:

 

 

 Salary
Reduction

 Employer
Match

 Profit
Sharing

 Total

 Individual
Participant
Limitation

 Lesser 100% of pay or $19,500 (2021 - indexed)

 Combined salary reduction and match cannot exceed lesser of 100% of participant's pay or $58,000. (2021 limit - indexed.)

 Lesser of 100% pay or $58,000 (2021 limit - indexed.)

 Individual limit from one or more sources. Lesser of 100% of pay or $58,000. (2021 limit - indexed.)

 Deductible Limit for Business Entity

 

 25% of eligible payroll for all sources (excluding salary deferrals) combined

 

Based on the objectives of the employer, a 401(k) profit sharing may be designed using one or more of the contribution sources to develop a competitive benefits package for the recruiting and retention of employees (an "employee" plan), or a plan to favor owners (an "executive" plan). The plan may blend elements of both objectives.