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Build 401(k) Plan Participation by Adding Profit Sharing

C Johnson 2014
Charlene S.  Johnson, MBA, CPC, QPA, QKA®, QPFC, TGPC, ERPA
Vice President, Senior Retirement Consultant
[email protected]
(585) 419-0670 x50690

Many a company has started a 401(k) salary deferral plan for non-tax as well as tax benefits. The most common non-tax benefits are to retain and attract qualified employees and to motivate present employees to improve their performance. But offering a plan with attractive features, such as matching contributions, investment options, and loan provisions, may not be enough to achieve the anticipated benefits. A low participation rate is a frequent 401(k) plan problem.

A Profit-sharing Feature Can Enhance the Attraction of Your Retirement Plan

According to the results of recent studies, the effect of profit sharing can be very positive on a company's competitiveness, profitability, and workers. Employer profit-sharing contributions to an existing 401(k) plan provide employees with a personal stake in the company's welfare. By making such contributions an employer can:

  • Boost efficiency, because employees feel personally responsible for profits
  • Avoid the losses and waste that discontent and carelessness can cause
  • Help cut employee turnover through rewarding continued service
  • Improve employees' job satisfaction
  • Add more financial security for employees' retirement
  • Emphasize management efficiency and encourage personal quality control
  • Increase corporate profitability

Profit-sharing Essentials

A profit-sharing plan is a type of tax-qualified retirement plan that an employer establishes in order to allow employees to participate in company profits. The employer generally makes contributions to the participating employees' plan accounts from company profits using the method that the plan documents specify. The plan's trustee holds and invests any employer contributions until plan distributions are made.

A primary employer benefit of a profit-sharing plan is its flexibility. No contributions are required if there are no profits in a particular year. The plan may also be structured so that even when there are profits, the annual contribution depends on the employer's assessment of its ability to make the contribution. Moreover, a profit-sharing plan can permit higher plan contributions than just a 401(k) plan. The 2013 maximum total per-employee is $17,500 for a 401(k) plus a catch-up contribution of $5,500 if the employee is age 50 or older. But the total "annual additions" maximum, including profit sharing, is $51,000 per employee account or 100% of annual compensation, whichever is less, in 2013. The employer's maximum deduction for profit-sharing contributions is 25% of the compensation paid for the year to participating employees.

Relatively Simple To Add

Making the changes necessary to add profit-sharing contributions to an existing 401(k) plan isn't difficult. The major difference is that a combined plan would include all eligible employees, even those who don't participate in your present plan. It is possible that as a result of their participation in profit sharing, more of your employees will be aware of retirement planning and choose to make voluntary 401(k) contributions as well.

For more information on profit sharing, 401(k), or combined retirement plans, please contact us at 585-419-0670.

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