Profit sharing is built into the design of all Guideline 401(k) plans and offered at no extra cost. In any given year, a business can elect to make a profit sharing contribution to its employees.
Making Profit Sharing Contributions for the 2018 Plan Year
If your business intends to make a profit sharing contribution for the 2018 plan year, you need to make a request before your business tax filing deadline. Guideline will start accepting profit sharing requests in February 2019 — a link will be visible in your dashboard — and requests will be processed from March through October, based on your filing deadline.
Reviewing and Electing Your Profit-Sharing Formula
As a default, all Guideline plans are set up with a safe harbor “comp-to-comp” profit sharing formula. However, you may also choose to allocate your profit sharing as a flat dollar amount to each employee. If you wish to change your profit sharing method (including the vesting schedule applicable to profit sharing contributions), you must do so before December 31, 2018 by contacting firstname.lastname@example.org.
The Comp-to-comp method (also called pro rata) takes a fixed contribution amount and allocates it among your employees based on their relative salaries. This is the default profit sharing method for Guideline 401(k) plans. See an example below:
The company profit share is $10,000. The total of all eligible employee compensation is $200,000.
Flat dollar amount method gives every employee a contribution that’s the same amount:
The company profit share is $10,000. Three employees share it equally — $3,333 each.
Setting up a one-time contribution
- There is no minimum amount for a profit sharing contribution. Contributions are made at a company’s discretion each year.
- Guideline doesn’t charge any extra fees for you to make a profit sharing contribution – you only pay your monthly participant fee, which applies to any active employee with a balance in their 401(k) account.
- Guideline only uses safe-harbor profit sharing formulas. Plan sponsors can be assured that any profit sharing contributions they make will not endanger an already compliant 401(k) plan from falling out of compliance. Contributions do not count toward the $18,500 annual deferral limit but the total profit sharing contribution is limited to 25% of eligible compensation. Additionally, total contributions per participant cannot exceed $55,000 for 2018, or $61,000 if you are age 50 or over.
Remember, Profit Sharing is completely discretionary and can be done regardless of whether the company actually makes any profit. Profit Sharing contributions are made as pretax contributions to employee 401(k) accounts.
If you plan on making a profit sharing contribution, check that your plan document includes provisions for the type of profit sharing you want (comp-to-comp vs. flat dollar).
After year end, assess your company’s finances and other factors and make a decision about whether (and in what amount) profit sharing will be appropriate for the year. Once you’ve decided, you can provide Guideline with the amount of the profit sharing contribution using your plan dashboard. After your request is submitted, Guideline will provide you with a confirmation notice to review before the profit sharing contributions are processed.
Remember, you will need to make your profit sharing contribution before your tax deadline (with extensions) so that they can be deducted on that year’s tax return. See our detailed guide to 401(k) profit sharing plans to learn more about the benefits of profit sharing.