Profit-sharing plans are very popular. They offer you the most flexibility when it comes to making contributions. Contributions may be determined by a formula written into your plan or at the discretion of your board of directors. Your plan can include an option to allow your company to make a contribution even if the company doesn't produce a profit.
Profit-sharing contributions are generally allocated to employees according to compensation. Employers can contribute 100% of the employee's compensation up to $49,000 for 2009. However, the maximum annual tax-deductible contribution that the employer is allowed to make cannot exceed 25 percent of the total compensation of all employees covered under the plan. The amount of benefits an employee will receive from a profit-sharing plan depends on several factors. First and foremost is company profitability. This can be a strong incentive for employees to perform well. Another important factor is the investment performance of the plan assets. With this in mind, the employee’s retirement benefit will generally be greater the longer he or she participates in the plan. Therefore, profit-sharing plans usually favor younger employees.
