PROFIT SHARING, money purchase, and other types of defined contribution (DC) plans can take the form of IRS pre-approved designs, or other designs that meet the employer’s objectives while still complying with IRS rules.

Pre-approved methods of allocating employer contributions include:

  • a level percentage of pay for each employee, and
  • an “integrated” plan that takes the employer’s FICA taxes into account by allocating an additional contribution for pay above the Social Security wage base.

 

Many other designs are possible when pre-approved plans aren’t good enough. Two examples are shown here:

  • A service-weighted plan that contributes a higher percentage of pay for each year an employee stays with the company. Service-Weighted plan allocates 1% of pay per year of service.
  • A “class allocation” plan that enables highly paid employees to defer more of their compensation while other employees take most of their compensation in cash. Class Allocation plan allocates 20% of pay for owner, 5% for employees.

 

Both of these examples are “cross-tested” plans, named after the IRS “cross-testing” process of  converting contributions into benefits for nondiscrimination testing.

profitsharing table

You can follow current defined contribution topics on the DC plan section of our retirement plan blog.