A Profit Sharing/401(k) retirement plan is a defined contribution plan. This plan can either be subject to ERISA requirements or they can be a church plan. If the employer is eligible to sponsor a church plan, the plan is not subject to certain ERISA requirements, such as annual 5500 reporting.  However, both ERISA and church plans will be subject to non-discrimination testing.

Both for-profit and many other types of tax-exempt organizations can establish these plans for their employees. For a for-profit employer, a significant tax advantage of this plan is the employer's ability to deduct up to 25% of the aggregate compensation of plan participants.

Who can participate?

All employees are eligible to participate unless the plan specifically excludes them.

Types of plan contributions

• Based on specific plan provisions, participants can elect to have their employer to withhold money from their paycheck that can be contributed as a tax-sheltered, after-tax or Roth elective deferral contribution.
• Based on specific plan provisions, employers can make matching, non-matching or discretionary contributions.

Eligibility

The employer has flexibility in determining which employees are eligible. As an example, an employer may impose age and/or service requirements before an employee can participate in the plan.

Potential tax advantages

• Employer contributions are not subject to Social Security tax or income tax at the time of the contribution.
• Tax-sheltered participant contributions are not subject to income tax until distributed.
• Rollovers from other eligible retirement plans or Traditional IRAs are possible without tax consequence.
• Earnings on all contributions and rollovers are tax-deferred.
• Earnings on Roth elective deferral contributions can be withdrawn tax-free, if certain conditions are met.

To learn more about the retirement plans available to your specific organization, email us or call us at 1-888-98-GUIDE (1-888-984-8433).