What is a Profit Sharing Plan?

Both 401(k) plans and profit-sharing plans are employer-sponsored retirement plans.  

A Profit Sharing Plan is a defined contribution plan that allows employers to make a contribution percentage of plan compensation or a flat dollar amount, depending on the terms of the plan document. Employers can decide how much to contribute based on the company's profit or other cash flows after the plan year ends. These plans provide employers with flexibility in the design of the plan, including fixed or discretionary contribution formulas. 

How Does A Profit-Sharing Plan Work?

Companies of any size, including non-profit organizations, can offer a profit-sharing plan. There are four common types of employer-sharing contribution formulas:

  • Pro-Rata Method.
  • Flat Dollar Amount Method.
  • age-Weighted Plan.
  • New Comparability Plan.

Learn more about what Profit Sharing is, How Profit Sharing Works, and the Pros and Cons of a Profit Sharing Plan through our Vestwell Blog.