Are Contributions necessary?
The original premises of a Profit Sharing Plan was that first you have a profit before you can share it. However, failure to ever make a meaningful contribution could be evidence that the plan was not adopted for its primary purpose of being an employee benefit plan. Generally during the first year of a new corporation, no employees will become eligible to participate for employer contribution purposes and often there is no profit to share. Why adopt an employee benefit during the first year? To attract valuable employees including yourself. During IRS audits, agents have generally conceded that no contribution would be necessary during the first year.
Are there minimums?
Since the ERSOP® Profit Sharing Plan is primarily intended to be an employee benefit plan for any employees that may become eligible, there is an expectation there will be contributions. There is an IRS memo from 2002 in which the Service felt that one half of one percent of salary accrual would be deemed meaningful. We encourage our clients to double-up, and contribute at least one percent of eligible compensation more often than not [2 out of 3, 3 out of 5 years], the more the merrier. Since contributions are a function of compensation, taking a salary would be required to permit a contribution.
The upper limits for 2014 are:
100% of salary up to $17,500 plus $5,000 “catch-up”
25% of salary to a maximum of $52,000 including salary deferral [401(k)].
Must contributions be equal in percentage or amount?
No! You may discriminate. You just may not discriminate in an unlawful manner. Ask us how.