Types of Profit Sharing Plans

Want to reward your team, save on taxes, and make your benefits package stand out? Profit sharing might be your new favorite tool. Let’s take a closer look at the reasons businesses add profit sharing to their benefits mix.

What Is Profit Sharing in a 401(k)?

Profit sharing is when a business gives employees a slice of the company’s profits—on top of their regular pay. When you add it to a 401(k), it means you’re putting extra money into your team’s retirement accounts.

Here’s the best part: you decide how much to give and when. Unlike a 401(k) match, you’re not locked into a set amount every year. If it’s a great year? Share more. Tight year? Share less—or not at all.

In 2025, you can contribute up to $70,000 per employee (or $77,500 if they’re 50+). That’s a big boost toward retirement.

How Does It Work?

Employees still save their own money in a regular 401(k). But with profit sharing, you add extra dollars from your business profits into their accounts. It’s a win-win: they save more, and you get a tax break.

3 Types of Profit Sharing

Not all plans are the same. Here are your options:

Pro-Rata (Simple &
Fair)

Everyone gets the same percentage of their salary. For employers who want a straightforward approach to profit sharing, this is a great choice.

New Comparability (Flexible & Strategic)

New comparability allows owners to make contributions to employees at different rates. Great if you want to give more to key team members or owners.

Age-Weighted (Great for Retention)

Older employees get a bigger share since they have less time for their money to grow. It’s a smart way to reward loyalty and keep experienced folks around.

Take a look at our Types of Profit Sharing Infographic, which goes into greater detail about the different profit sharing options.

Why Employers Love It

Profit sharing isn’t just good for your team—it’s great for your business.

Control Costs: The amount you contribute is completely up to you, so you can choose the amount that makes the most sense for your business. You can even divide employees into distinct eligibility groups, which allows you to be more targeted with your retirement benefits.
Attract & Keep Talent: Want to stand out in a competitive job market? Offering profit sharing shows you invest in your people. Using the employer contribution baseline of 4.8%¹, you can choose to offer a higher contribution rate in order to attract and retain top talent.
Lower your Tax Liability: What sets profit-sharing plans apart is the flexibility to lower your business’ taxable income more in profitable years and less in a down year. Profit sharing also allows you to double the amount you can save per year in your 401(k). In 2025, your contribution limit for a basic 401(k) is $23,500 ($31,000 for catch-up contributions), but with a profit sharing plan you can put away up to $70,000 per year (or $77,500 for employees over the age of 50).

Download Fisher\SMB’s Tax Savings Guide to learn more about the tax benefits of a 401(k) profit sharing plan.

Why Employees Love It

Your team will appreciate the extra boost.

More Retirement Savings
- American employees know they are underprepared for retirement. According to CNBC’s August 2024 Your Money retirement survey, only 37% of U.S. workers feel “on schedule” or “ahead of schedule” with their retirement investments.² Adding a profit sharing component can be the big boost employees need to feel confident about their retirement savings.
Rewards for Hard Work
- Employees know their work can make all the difference in helping their employers reach profitability. By sharing your profits with employees through a 401(k) profit sharing plan, you’re giving them a direct incentive to work harder and keep the company in the black.

Profit-Sharing Plan Rules

401(k) profit-sharing plans come with a few rules you’ll need to follow to stay compliant with U.S. law³:

Contribution Limits: Only compensation up to $350,000 per year can be considered; more than that would increase total contributions beyond the $70,000/$77,500 annual limit.
Disclosures and Forms: Employers are required to issue disclosures to employees and anyone else who participates in the plan. Additionally, Form 5500 must be filed with the Department of Labor annually.
Funding Deadline: Contributions are due by April 15 (unless you file an extension). Review our 2026 Compliance Calendar & Checklist for more information on funding deadlines.

How to Get Started

Adding profit sharing to your 401(k) is easier than you think. The best profit-sharing plans align with a company’s goals, allowing you to maximize the strategic benefits of your plan and administer the plan efficiently. But to do it right, you’ll want to:

Set clear goals (tax savings, retention, etc.)
Choose the right plan type
Work with a provider who knows the ropes

Let’s Make Plans

Ready to explore profit sharing at your company? We’re here for you. At Fisher\SMB, we can help you share the wealth with your employees while maximizing the value of your retirement benefits for you. Contact us anytime to talk about how we can help you build the right retirement plan for you.

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