Retirement Services & Financial Advisors​ - Serving Columbus & Beyond

        

    Pro Rata Non-Integrated:

    When you think of profit sharing contributions, this is generally the most basic.  It allocates the dollar total based on compensation, hours or even points.  Points being a total given based on years of service, age, dollar amounts or even a combination.  The share for each employee is based on their total out of the total for all eligible employees.   This gives an equal percentage for each employee.  Lets assume the following eligible employees below:

    Employee #1: $40,000

    Employee #2: $75,000

    Employee #3: $125,000

    Total Eligible Compensation: $240,000

    Here is what each employee would receive with a profit sharing dollar total of $10,000

    Employee #1: ($40,000 / $240,000) * $10,000 = $1,666.67

    Employee #2: ($75,000 / $240,000) * $10,000 = $3,125.00

    Employee #3: ($125,000 / $240,000) * $10,000 = $5,208.33

    So in this case each employee is receiving 4.17% of their compensation.  The allocation can also simply be what’s called per capita.  This forgoes all the calculations above, and each person gets the same dollar amount.  So in the example above, all three would get $3,333.33.  This is what the IRS calls a safe harbor allocation method which means it requires no additional testing.  This method is an easy way to give every employee a fair even dollar amount.  It can get expensive if trying maximize certain employees.

    Integrated

    This takes the first allocation method and adds in the social security wage base.  It gives a greater benefit to employees who earn over the wage base.  The reasoning here is that someone only receives a benefit up to the wage base for what they pay into social security.  If they earn over this amount, the IRS allows there to be a disparity between what these employees receive for their profit sharing compared to the others.  This helps make up for the fact they aren’t getting any benefit from social security on dollars they earn over the wage base.  For 2015, the wage base is $118,500.  So in the example above the employee earning $125,000 gets a slightly higher allocation.  There are other factors that come into play here but for simplicity we’ll assume the example above and that they use the full wage base.  Here is a quick summary:

    Employee #1: $40,000

    Employee #2: $75,000

    Employee #3: $200,000

    Total Eligible Compensation: $315,000

    Here is what each employee would receive with a profit sharing dollar total of $10,000

    Employee #1: ($40,000 / $315,000) * $10,000 = $1,269.84

    Employee #2: ($75,000 / $315,000) * $10,000 = $2,380.95

    Employee #3: ($281,500 / $315,000) * $10,000 = $8,936.51

    Notice that Employee #3 has a slightly higher eligible compensation.  This is due to the amount he earned over the wage base of $118,500.  Like the non-integrated method, this is a safe harbor allocation method and requires no additional testing.  It’s a good way to benefit employees earning a higher wage.  Other options can adjust the wage base and excess percentage.   For more specifics and design options contact your design specialist to go into further detail. 

     Cross tested or New Comparability Formula

    This allocation method affords greater flexibility but along with it comes additional testing.  The design method separates employees into groups, or each employee could be in their own group.  By doing this, an employer could reward certain employees, certain job categories or more frequently attempt to maximize certain individuals.  For example, a company could separate its employees into three groups; 1) Stockholders, 2) Managers, 3) All other Associates.  They could then assign a dollar amount or percentage of eligible compensation to each group.  These contributions then need to be tested to ensure no discrimination between highly compensated employees and non-highly compensated employees.  The advantage here is that the profit sharing plan can be “cross-tested” as a defined benefit plan.  This factors in years to retirement and an assumed interest rate to create a present value of the future benefit.  So a younger employee with many years till retirement is assumed to have a lot of years to accrue interest.  So their equivalent benefit will be much higher than the current dollar amount received.  This helps when you compare the amount to a current larger dollar sum given to an older highly compensated employee owner with fewer years to retirement.  There are other testing issues and minimum amounts that come into play but we will design an allocation that best suits your needs.  Please contact your plan design consultant to discuss in further detail.