Flexible Profit Sharing 401(k) Retirement Plans
Share company profits with employee retirement accounts based on cash flow
Profit Sharing 401(K) Testimonial
Langan Financial Group has handled our personal and business finances for many years. They oversee our 401(k), profit sharing, personal and retirement planning.
Everyone at Langan Financial is professional, knowledgeable and extremely personable. I highly recommend Langan Financial Group for all your financial and planning needs.
What is a Profit Sharing 401(k) Plan?
A profit sharing 401(k), also known as a deferred profit sharing plan, is a type of retirement plan that offers employees a share of the company's profits.
These plans can be combined with additional group retirement plans within an organization. This is the difference between an independent profit-sharing plan and a hybrid plan.
Hybrid plans allow employers to add an additional feature to their retirement plans, offering employees a potential additional contribution from the company's profits.
What are the Benefits of Profit Sharing 401(k) Plans?
A major benefit of a Profit Sharing 401(k) plan, is its design customization ability. The employer can customize some aspects of the plan such as:
- Profit Sharing Employee Eligibility
- Profit Sharing Contribution Timing
- Profit Sharing Distributions and Loans
- Profit Sharing Formula
Types of Profit Sharing 401(k) Plans
The Profit Sharing allocation method is determined in the plan document. Once it is created, the only way to change the allocation method is by adopting a new amendment within the plan.
The type of Profit Sharing 401(K) plan will determine which profit allocation method is used. There are five types of profit-sharing formula methods:
Pro Rata Plan is also known as Salary Proportional Method
The most common formula used is the pro-rata method. This method contributes an allocated percentage of their compensation.
The formula accounts for:
- Total of all eligible participants' compensation
- Each participant's annual compensation is divided by the total eligible compensation giving a percentage
- Each eligible participant will have a percentage from the previous step that will be multiplied by the total profit-sharing contribution to find their profit-sharing contribution
New Comparability Method
Age Weighted Method
Flat dollar Method
The flat dollar contribution formula provides the same contribution amount to each eligible employee regardless of participants' pay or age.
An integrated method provides higher contributions for eligible participants over a set pay threshold as long as the IRS' permitted disparity rules are followed. The set pay threshold is typically any employee who is compensated above the Social Security Taxable Wage Base.
These individuals will receive an additional contribution of the lesser:
- Two times the base contribution percentage
- The base contribution percentage plus the permitted disparity factor
Profit Sharing Retirement Plan Requirements
Profit Sharing 401(k) Plan Eligibility Requirements
Within a Profit Sharing 401(k) plan, the employer can define what constitutes an eligible employee. He or she can limit to:
- Employee is at least 21 years old
- Employee has one year of service
- Employee has worked 1,000 hours or more during a plan year
401(k) Profit Sharing Contribution Requirements
Contribution timing refers to when a business contributes profit-sharing revenue to an employee's retirement plan.
The most common Contribution timing method is a one-time, end-of-year contribution.
The contribution must be added to the plan before the corporate tax deadline, including the extension, and be counted as an allocation for the previous plan year.
Profit Sharing 401(k) Plan Distributions Requirements
Distributions for a profit-sharing 401(k) plan are slightly different from a standard 401(k).
The contributions can be disbursed when the employee reaches the retirement age stated in the plan and has at least five years of service. If the employee is under 59 ½ they will incur a 10% penalty for early distribution.
Distribution methods available include:
- Lump sum distribution
- Periodic or installment distributions
- Ad hoc (Random) distributions
- Annuities
Profit Sharing 401(k) Plan Loan Requirements
The employer may allow for hardship loans from the profit-sharing 401(k) plan. It is dependent on whether the employer wants to allow access to the plan during such times or if they want the plan to be solely for retirement planning.
When setting up the criteria for a loan, the plan can include:
- What defines a hardship? asdfadf
- Requirements to pay back a loan.
- What are the loan terms?
Profit Sharing 401(k) Contribution Limits
Profit-sharing contributions can be a part of a traditional 401(k) plan. Contributions to the plan will be in the following three forms:
- Employee elective deferrals
- Employer matching contributions (if allowed per plan description)
- Employer profit-sharing contributions
Employee elective deferrals are the normal participant contribution to a 401(k) plan. They are limited to the contribution limit set by the IRS each year.
It is a good idea to take full advantage of an employer’s match program by making the maximum matchable contribution.
Employer match contributions are possible with a combined plan, but they are not mandated. It is up to the employer when designing the structure of the plan to decide if they will provide an additional match program.
Without factoring in any catch-up contributions, the annual limit for a profit-sharing plan in 2023 is $66,000.
Setting up a 401(k) Profit Sharing Plan
Below are the four main steps needed to set up a Profit Sharing 401(k) plan.
- Adopt a written plan document
- Arrange a trust for the plan's assets
- Develop a recordkeeping system
- Provide plan information to eligible employees
The written plan document will outline the terms, the plan's features, and its operations. It will include, but is not limited to:
- Profit sharing allocation formula
- How contributions are deposited
- Employee eligibility requirements
- Vesting schedule
- Loan and distribution terms
Setting up the trust for the plan assets will ensure the contributions are used only for the participants and their beneficiaries. The trust must have at least one trustee to handle:
- Contributions
- Plan investments
- Distributions
The recordkeeper will track and properly manage:
- Contributions
- Earnings and losses
- Plan investments
- Expenses
- Benefit distributions
Through tracking these items, recordkeepers can assist in preparing the plan's annual Form 5500.
Finally, the employees must be contacted to provide information about the plan:
- Features
- Benefits
- Employee rights
Profit Sharing 401(k) Services
If you are considering a Profit Sharing 401(k) plan, Langan Financial Group is a fantastic option to help you achieve your retirement plan goals.
We take a collaborative and engaging approach with employers to align the plan's design with the owner's financial goals.
We provide:
- Regularly scheduled plan reviews
- Regularly scheduled plan benchmarks
- Investment policy statement reviews
- One on one financial planning support
- Educational seminars and workshops
Our 401(k) Benchmark Services
Our 401(k) advisor services focus on helping your employees better prepare for retirement. In addition, we will benchmark Profit Sharing 401(k) plans to help ensure it is performing to the best of its ability. We will compare your current retirement plan against other options available.
This retirement plan review will:
- Evaluate portfolio performance
- Review plan fees
- Review participant fees
- Review vendor services
- Review ERISA compliance
This benchmark will help determine:
- Do you have appropriate fiduciary coverage to reduce liabilities from your Profit Sharing 401(k)?
- Are your plan's fees competitive?
- Are your employees engaged?
- Is this the right plan for your goals?
Set Up a Time to Chat about Your 401(k) Plan
Langan Financial Group's 401(k) advisors have over 100 years of experience servicing retirement plans for organizations.
We have an experienced, highly educated team that specializes in retirement plan programs for organizations. In fact, one retirement plan advisor is a licensed attorney specializing in ERISA law, the law that governs retirement plan regulations.
While this individual does not practice law on behalf of Langan Financial Group, this perspective allows our team a deeper insight into setting up and managing retirement plans for organizations.
Give us a call at 717-288-1880 to see how our local 401(k) advisor can help with your retirement plans. Or visit our profit sharing advisor contact page to fill out an inquiry.
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Disclosure: Check the background of your financial professional on FINRA's BrokerCheck. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Cambridge and Langan Financial Group, LLC. are not affiliated. Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, to residents of: AL, AZ, CO, DE, FL, GA, IA, KY, MD, NJ, NM, NY, NC, OH, PA, TX, VA, WI Cambridge and Langan Financial Group does not offer legal advice. Estate planning services are in regards to your overall financial plan. Always be sure to speak to a legal professional in regards to specific legal matters. Fixed insurance services offered through Langan Financial Group.
Testimonial/Endorsement Disclosure: The testimonials may not be representative of the experience of other customers. The testimonials are no guarantee of future performance or success. All of the testimonials/endorsements are clients with the exception of Steven Martinez of York SPCA. There was no cash nor non-cash compensation for any of the testimonials provided.
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Harrisburg, PA Office
Address: 1863 Center St, Camp Hill, Pa 17011
Phone: 717-288-1880
York, PA Office
Address: 3405 Board Rd, Suite 200, York, Pa 17406
Phone: 717-773-4085
