Profit-sharing plans are among the most popular employer-sponsored retirement plans. These straightforward plans allow you, as an employer, to make a contribution that is spread among the plan participants. You are not required to make an annual contribution in any given year. However, contributions must be made on a regular basis.
With a profit-sharing plan, a separate account is established for each plan participant, and contributions are allocated to each participant based on the plan's formula (this formula can be amended from time to time). As with all retirement plans, the contributions must be prudently invested. Each participant's account must also be credited with his or her share of investment income (or loss).
For 2020, no individual is allowed to receive contributions for his or her account that exceed the lesser of 100 % of his or her earnings for that year or $57,000 ($56,000 in 2019). Your total deductible contributions to a profit-sharing plan may not exceed 25% of the total compensation of all the plan participants in that year. So, if there were four plan participants each earning $50,000, your total deductible contribution to the plan could not exceed $50,000 ($50,000 x 4 = $200,000; $200,000 x 25% = $50,000). When calculating your deductible contribution, you can only count compensation up to $285,000 in 2020 ($280,000 in 2019) for any individual employee.