Unlike a match, profit sharing contributions go to all eligible employees and not just those who participate in the plan.
There are three types of profit sharing contributions. Section D.22 of your plan document will explain which of the following options your plan allows.
- Pro-rata: By far the most common, a pro-rata contribution allocates money as an even percentage of compensation amongst all employees.
- Integrated: Integrated contributions are similar to pro-rata except for that amounts over the taxable wage bases can receive a slightly higher percentage rate.
- New Comparability: New comparability allocations only work in very specific scenarios. Namely, if a plan's owners are older than their employees and make a lot of money. Please refer to this article to learn more.