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Why 401k Profit Sharing is the Best Thing to Ever Happen to Small Business Owners

9 May 2017 No Comment

A 401(k) profit-sharing plan is an employer-sponsored workplace retirement plan that employers can offer as an alternative to 401(k) plans. Employers who offer this plan have to provide their employees with a share in their company’s profits, but for a small business, it can also prove to be quite beneficial. A 401(k) profit-sharing plan can actually contribute to the overall bottom line and morale of a small business. Furthermore, 401(k) profit-sharing can even be used as a means of saving on corporate taxes.

A 401(k) profit-sharing plan can also be offered as an addition to a regular 401(k) plan. 401(k) profit-sharing plans are also similarly protected by federal laws. However, the calculation of the investment limits, situations where such a plan would be ideal and those who can contribute to it tend to distinguish it from a regular 401(k) retirement plan. Along with saving on corporate taxes, this plan can also serve as a way of motivating and rewarding employees.

For Whom Is a 401(k) Profit-Sharing Plan Suitable?

While a 401(k) profit-sharing plan is meant to be a workplace retirement plan, it can be equally beneficial for employers to offer it. Since it is a contribution plan, employers are responsible for deciding how much and when their company will contribute to the plan. While it is the salary level of each employee and/or their position within the company that determines the share they receive, a small business owner may also use a 401(k) profit sharing calculator to determine it.

The foremost difference when it comes to 401(k) profit-sharing plans is that contributions cannot be made by the employees. As per the rules of this plan, only the employer can make contributions and they do not have to contribute a fixed amount, so it is up to their discretion how much they contribute. Depending on factors like the financial performance of their company, it is also completely acceptable for the business owner to not make a contribution during a certain year and then make it the next.

What Is the Tax Advantage of a 401(k) Profit-Sharing Plan for a Small Business Owner?

Until and unless a company distributes contributions and earnings, the Federal Government and the governments of most American states do not usually tax them. Thus, small business owners can save a considerable amount of money in corporate tax if they defer some of those contributions and earnings through a 401(k) profit-sharing plan.

As of 2017, the annual tax deferral limit is $54,000 and small business owners can reach it quite easily with the help of a 401(k) profit-sharing plan. In other words, the tax advantages of a 401(k) profit-sharing plan are not too different from those of a regular 401(k) plan. However, business owners have a bit more control over how and when they actually make contributions, which enables them to control their tax savings as well.

When Should Employers Offer Their Employees a 401(k) Profit-Sharing Plan?

As beneficial as a 401(k) profit-sharing plan for small business owners, especially in the case of tax savings, they should still consider particular factors before offering it. Small business owners who want to set up and run this kind of workplace retirement plan should actually think of consulting a financial institution or professional who specializes in such plans.

Of course, the plan should be in writing and the features that will be offered to employees, such as how and when contributions will be allocated, should be stated explicitly. Ultimately, it will be up to the eligible employees to decide whether or not they want to opt for such a plan, it will become necessary to not only notify them, but also provide them with all the relevant information.

A 401(k) profit-sharing plan can be set up exclusively with insurance contracts or a trust can be arranged for it. When offering this plan, business owners should also strongly consider developing a recordkeeping system and figuring out the amount they will be contributing each year, even though it does not have to be fixed.


Last but not least, before small business owners decide to offer a 401(k) profit-sharing plan to their employees, they should be confident enough that their company is profitable and will continue to generate money for the years to come. Even though an employer is not obliged to make contributions, it would not look and seem good if the business owner is not able to make a contribution a year after the plan is announced. The corporate tax savings that are made possible by a 401(k) profit-sharing plan cannot be denied, but small business owners should consider all of the above before offering it.

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