Not All Profit Sharing Plans Are Created Equal

Learn how the right profit sharing formula may help business owners increase contributions and improve tax efficiency.

Types of Profit Sharing

New Comparability

Often the most cost-effective for owners because it allows for multiple benefit groups each with their own contribution rates. This means owners can receive a substantially higher portion than non-owners.

Pro-Rata

The simplest and most common type. All employees must receive the same proportional amount, including the owner.

Age-Weighted

Allows a business to allocate a higher percentage to older employees because they are closer to retirement; younger employees receive a smaller portion.

Integrated

Allows an employer to contribute different amounts to employees based on their Social Security tax levels. This means higher paid employees typically receive a higher contribution.

	New Comparability	Pro-Rata	Age-Weighted	Integrated
Who Should Consider	Owners who want to maximize contribution Businesses with <25 employees per owner Owners who are older than employees	Owners who don’t want to maximize their contribution Businesses looking for the simplest method	Businesses looking to give a higher contribution to older employees	Business looking to give a higher contribution to high earning employees
Grouping Criteria	Flexible	N/A	Employee Age	Social Security Tax Level
Calculation Formula	% of Salary	% of Salary	% of Salary	% of Salary
Pros	Can be the most cost-effective way for owners to maximize their portion of the company contribution	Simple	Allows businesses to reward older employees	Allows businesses to reward high earning employees
Cons	Not cost-effective for all demographics	Owner typically isn’t able to maximize their annual contribution	Not cost-effective for all demographics	Not cost-effective for all demographics

Pro-Rata vs. New Comparability

Often times plans utilize a pro-rata profit sharing formula because it’s the simplest. However, changing from pro-rata to new comparability can save the business owner significantly in cost without compromising tax savings. Consider the example below, where a business owner was able to reduce contribution costs by $51,000 per year.

Employee	Age	Annual Compensation	Pro-Rata	New Comparability	Results
Owner	62	$250,000	$50,000	$50,000	–
Employee 1	45	$100,000	$20,000	$5,000	-$15,000
Employee 2	45	$75,000	$15,000	$3,750	-$11,250
Employee 3	40	$75,000	$15,000	$3,750	-$11,250
Employee 4	35	$50,000	$10,000	$2,500	-$7,500
Employee 5	25	$40,000	$8,000	$2,000	-$6,000
Total Employer Contribution			$118,000	$67,000	-$51,000
% to Owner			42%	75%	+33%
% to Employees			58%	25%	-33%

New Comparability Benefits & Considerations

Benefits

Allows for maximum cost-effective employer contributions
Contributions are flexible & tax-reducing
Can add a vesting schedule of up to 6 years

Considerations

Can be expensive to provide an employer contribution to eligible employees
Can be complex. Consult with a specialized advisor to evaluate

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