Profit Sharing Plan is a retirement plan in which the contributions are made solely by the employer. The business owner has the flexibility to contribute and deduct between 0% and 25% of eligible participant's compensation up to a maximum each year. Several allocation methods are available:

  • Same percentage of compensation for each participant

  • Permitted Disparity (Social Security Integration)

  • Age-Weighted

Plan Eligibility:

  • Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, can establish a Profit Sharing plan.

  • All eligible employees must be allowed to participate in the Profit Sharing Plan. An eligible employee is any employee who:

  • has provided service to the employer for up to 2 years

  • Union employees and non-resident aliens who have no U.S source of income may generally be excluded from coverage.

  • If the elected waiting period is 1 year or longer, the employee must normally work 1,000 hours during the 12-month period beginning on the date of employment and satisfy the plan's service requirement in order to enter the plan.

  • If the waiting period is less than 1 year, all employees must be included after satisfying the eligibility requirements regardless of the number of hours worked during the year.

  • The employee's minimum age is elective but cannot exceed age 21.

Note: An employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.


Vesting is the participant's ownership in the value of his/her retirement account or benefit. The vesting schedule elected by the employer applies to all participants.

  • If the service requirement is 1 year or less, a graded vesting schedule may be elected. The most common graded schedule is 0% the first year and 20% per year thereafter.

  • If the service requirement is greater than 1 year, vesting must be 100% immediately upon becoming a participant in the plan.

Tax Advantages:

  • Employer contributions are tax deductible for the employer -- up to the lesser of 25% of the total participant's compensation.

  • Tax-deferred growth potential is possible -- any investment earnings grow tax-deferred until withdrawn.

Plan Deadline:

The deadline to establish a Profit Sharing Plan is the last day of the fiscal year of the business. For calendar year businesses, this deadline is December 31st.

Contribution Flexibility:

No annual contribution is required

  • Contribution percentage can vary each year, from 0-25% of compensation, up to a dollar maximum per participant each year.