Your employer may choose to contribute directly to employees’ 401(k) accounts. This is known as profit sharing. Profit sharing enables an employer to either pay a percentage of compensation to each eligible employee's account throughout the year, or assess finances available at the end of the year and decide a one-time contribution.
How does my employer determine how much to contribute?
The term “profit-sharing” can be misleading because your employer can choose to make a contribution, regardless if they make a profit or incur a loss for the year. Similarly, even if the company makes a profit, they’re not obliged to make a contribution. Thus, the decision to make a profit sharing allocation is completely at your employer’s discretion.
How much will I get if my employer makes a profit sharing contribution?
Once your employer decides to make a profit sharing contribution, the pot must be allocated fairly among eligible employees. With a Guideline plan, allocations can be split among eligible employees in one of two ways:
- As an equal amount: The same amount across the board for everyone – e.g. $1,000 to each employee.
- As a percentage of compensation: Based on a percentage of your compensation in relation to the total compensation pool:
The company profit share is $5,000.The total of all eligible employee compensation is $150,000.
|Alice||$45,000||$45,000/$150,000 = (0.30 * $5,000)||$1,500 (30%)|
|Bob||$30,000||$30,000/$150,000 = (0.20 * $5,000)||$1,000 (20%)|
|Carrie||$75,000||$75,000/$150,000 = (0.50 * $5,000)||$2,500 (50%)|
Profit sharing is a great way for employers to share business successes with their team.
It’s great if your employer offers profit-sharing – but if not, contributing to your 401(k) account is still a great way to save for retirement. Profit-sharing is just another added perk.