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What are Profit Sharing and Money Purchase Plans?
Overview: General Characteristics
- Plans can be combined
- Definite formula for contributions
- Maximum contribution up to 25% of compensation
- Maximum contribution up to 25% of compensation (depending on the allocation method that is used, one could receive up to the lesser of 100% of compensation or $46,000)
- Can fund the plan up to tax filing deadline with extensions, but plan must be established by year-end
- Can exclude part time employees (<1000 hours of service/year) or require up to 2 years of service to participate)
- Can have a vesting schedule
What is the difference? Qualified Profit Sharing Plans versus Qualified Money Purchase Plans
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Qualified Profit Sharing Plans
- Flexibility in funding - Employer may vary contributions from year to year
- Up to 25% of plan compensation deductibility for employer
- Contributions may be linked to profits
- In-service distributions are permitted
- Flexibility in funding up to 25% of compensation
- Loans available
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Qualified Money Purchase Plans
- Employer MUST contribute each year
- Contributions are fixed - not linked to profits
- Up to 25% deductibility for employer
- No in-service distributions
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Eligibility
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Employer Eligibility
Eligible employers include:
- Corporations
- Partnerships
- Non-profit organizations
- Corporations
- Sole Proprietors (Self Employed)
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Employee Eligibility
An employer can always choose to make all employees eligible to participate in a qualified plan, however the employer is permitted to adopt the following eligibility requirements:
- Employee must have attained the age of 21
- Employee must have completed two years of service if 100% vesting is elected, or one year of service if a vesting schedule is elected
- Employer can require up to 1000 hours of service to qualify as a year of service
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Deductibility limits can be confusing and tax laws are frequently changing. It is always best to review your specific situation and/or circumstances with a qualified tax advisor. For more information visit www.irs.gov.
Please Note:
Each alternative offers different investment choices and restrictions. Please speak with an experienced retirement specialist today by calling 1-800-50-PLACE or 1-919-719-7200. *Assumes you are qualified to hold such accounts.
It is important to review each plan and available investments within the plan as each custodian is different and not required to offer the same investments or charge the same fees as another custodian.
IRS Circular 230 Notice: These statements are provided for information purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor.
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Self-Employed 401(k) - Individual 401(k) - Owner Only 401(k) Plans
Learn more about the available Qualified Plans available to be held in your Place Trade Brokerage Account or Managed by Place Trade and held fund direct at major investment management companies.
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Helpful Links:
Trading Permissions in an IRA Account Configuration: IRA FAQs
Get more info on Retirement Planning for Large and Small Businesses:
Qualified Plans SEP IRAs SIMPLE IRAs Qualified Plans: One-Participant 401(k) Plans Qualified Profit Sharing Plans & Qualified Money Purchase Plans Retirement Plan Rollover Chart Rollover Your 401(k) Retirement Planning Tax Reporting
