Profit Sharing: 5 Key Items to Consider

Updated for plan year 2025 (with 2026 outlook) and rebranded for Tandy Consulting Inc. We help small and mid‑sized employers design tax‑efficient profit sharing integrated with a 401(k).

Book a consult See 2025 limits

Guideline partner • Fractional CFO advisory • Fiduciary‑aware plan design

Align pay & performance

Reward owners and top performers while remaining compliant.

Tax‑efficient

Shift compensation into deductible employer contributions.

Compliance support

Nondiscrimination testing & design guardrails.

Plan design expertise

Traditional • Age‑weighted • New comparability.

Key IRS limits (2025) and outlook (2026)

2025 limits are official. 2026 amounts are forecasts--final IRS numbers typically publish late fall.

Elective deferral (401(k) salary deferrals) -- IRC §402(g)

$23,500 (2025)

Catch‑up (50+): $7,500 (2025). Ages 60--63 may have higher catch‑up once finalized under SECURE 2.0.

Total additions (employee + employer) -- IRC §415(c)

$70,000 (2025)

Per‑employer limit; separate from catch‑up contributions.

Confirm limits in your plan documents and current IRS guidance.

Example

Sally earns $60,000. A 10% profit‑sharing allocation adds $6,000 to her retirement account--funded by the employer, separate from her own deferrals.

✔ Employer deduction; employees build larger balances.

The 5 Key Items to Consider

1) Define your goals

Maximize tax‑efficient contributions, retain talent, reward key groups, or broaden profit participation. Clear goals drive the right plan design.

Boost owner and highly‑compensated employee savings
Retention and performance alignment
Business tax optimization

2) Choose a plan design

Three common approaches: Traditional (same % for all), Age‑Weighted (higher % for older employees), and New Comparability (custom groups).

We model allocations across scenarios
Target groups as narrow as one employee
Stay within nondiscrimination limits

3) Coordinate with your 401(k)

Profit sharing is employer‑funded and pairs well with a 401(k) to reach the §415(c) annual additions limit.

Employee deferrals + employer profit sharing
Potential for higher total savings vs. deferrals alone
Works with pre‑tax and Roth deferrals

4) Administration & fiduciary awareness

Expect eligibility tracking, allocation calculations, and testing (ADP/ACP and coverage). We help minimize risk with calendar‑based workflows.

Nondiscrimination & coverage testing cadence
Ongoing workforce data checks
Documentation & participant comms

5) Work with an experienced advisor

Leverage design expertise, testing support, and recordkeeper coordination. As a Guideline partner, we streamline implementation and operations.

Allocation modeling and "what‑ifs"
Quarterly testing reviews
Transparent, flat advisory pricing

FAQs

Do we need a 401(k) to offer profit sharing?

Not strictly -- but most small employers integrate profit sharing into a 401(k) because it's familiar to employees and makes reaching the annual additions limit more attainable.

How are allocations set?

Your plan document defines eligibility, groups, and formulas. We model designs to meet your goals while passing required coverage and nondiscrimination tests.

What about age‑based or role‑based contributions?

Age‑weighted and new‑comparability designs can tilt allocations toward older or key groups -- within IRS rules. We'll show trade‑offs before you decide.

Are catch‑up contributions included in the $70,000?

Catch‑up contributions for participants age 50+ are in addition to the §415(c) annual additions limit. Confirm specifics in your plan.

Let's tailor a profit‑sharing strategy for your team

From benchmarking to plan docs, allocations, and annual testing -- we'll handle the heavy lifting while you focus on running the business.

📅 15‑minute intro consult 📞 (949) 619‑6383 ✉ ttandy@tandyconsulting.com 🏢 Serving CA & nationwide