Profit sharing is a pre-tax contribution employers can make to their employees’ retirement accounts after the end of the year. There are several types of profit sharing formulas your company may want to utilize, depending on your business needs and situation: pro-rata, flat-dollar, or new comparability.
With a Guideline Core or Enterprise plan, you can utilize all 3 formulas. However, there is a fee for Core plans that wish to use new comparability profit-sharing.¹
Here’s how each formula works and calculation examples.
Pro-rata profit sharing formula
The pro-rata (also known as comp-to-comp) profit sharing formula takes a fixed contribution amount and allocates it to your employees in equal percentages based on their relative compensation. This formula is the default profit sharing method for Guideline 401(k) plans.
Pro-rata example:
Atmos Inc. wants to give a profit sharing contribution totaling $10,000. The amount of all eligible employee compensation is $200,000. In this case, each participant receives a contribution equal to 5% of their compensation.
Employee | Compensation | How It’s Calculated | Contribution (%) |
Susan | $40,000 | $40,000 * ($10,000 / 200,000) | $2,000 (5.0%) |
Ian | $60,000 | $60,000 * ($10,000 / 200,000) | $3,000 (5.0%) |
Barbara | $100,000 | $100,000 * ($10,000 / 200,000) | $5,000 (5.0%) |
Flat-dollar profit sharing formula
The flat-dollar formula gives every employee the same contribution amount.
Flat-dollar example:
Atmos Inc. wants to give a profit sharing contribution totaling $10,000. Three employees share it equally, receiving $3,333 each.
Employee | Compensation | How It’s Calculated | Contribution (%) |
Susan | $40,000 | $10,000 / 3 (to each employee) | $3,333 (8.33%) |
Ian | $60,000 | $10,000 / 3 (to each employee) | $3,333 (5.55%) |
Barbara | $100,000 | $10,000 / 3 (to each employee) | $3,333 (3.33%) |
New comparability profit sharing formula
New comparability profit sharing looks at factors such as age and compensation amount to provide more customized contributions. These calculations can be more complex and dynamic than those for other profit-sharing formulas.
New comparability profit sharing is available for Enterprise plans with a safe harbor employer contribution for the current year. Core plans interested in this profit sharing model can add this service for a fee by contacting Sponsor Support.
Learn more about new comparability profit sharing here.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.
¹ Profit sharing is not available for Guideline Starter plans. Please visit our pricing page for more information on our plan tiers. See our Form ADV 2A Brochure for more information about our fees.