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Tax Savings for Business Owners Part 3 – 401(k) with Profit-Sharing Plan

401(k) with Profit-Sharing Plan

Maximize Your Retirement Savings with this Combination Plan

In today’s blog, we continue our series about tips to reduce your taxes with company retirement plans. As a business owner, you are likely looking for ways to maximize your retirement savings while incentivizing your employees. One way to achieve both these goals is by offering a 401(k) with a profit-sharing plan. We will explore the benefits of this plan and show examples, so you can see how it can help you and your employees.

What is a 401(k) with a profit-sharing plan?

    A 401(k) with a profit-sharing plan is simply the combining of two plans to offer a greater benefit to you and your employees. This powerful duo allows you to help your employees save for retirement with a 401(k) and to share in the company’s success as a reward with the profit-sharing plan. In a 401(k), employees contribute a portion of their salary on a pre-tax basis, and those funds grow tax-deferred in the account until they’re withdrawn in retirement. The amount you, as the owner, contribute to the profit-sharing plan is based on a percentage of each employee’s salary.


As you can imagine, there are many benefits when you combine plans. I want to mention six benefits of this dual plan option.

  • Increased Retirement Savings
    One of the primary benefits of a 401(k) with a profit-sharing plan is that it allows both you and your employees to save more for retirement. Currently, employees can contribute up to $20,500 per year to their 401(k) accounts, and those over 50 can make additional catch-up contributions of up to $6,500 annually. The profit-sharing portion of the plan can also add significantly to the total amount saved. For example, if you contribute 10% of an employee’s salary to the profit-sharing plan, and their salary is $50,000, they will receive an additional $5,000 in retirement savings.
  • Tax Benefits 
    Another advantage of this type of plan is its tax savings for employers and employees. Employee contributions to their 401(k) accounts are made on a pre-tax basis, which reduces their taxable income. This provision means they’ll pay less in taxes now and can defer paying taxes on their retirement savings until they withdraw the funds in retirement. For employers, contributions to the profit-sharing plan are tax-deductible, which can help reduce your business’s tax liability.
  • Retain Employees and Increase Loyalty 
    Offering a 401(k) with a profit-sharing plan can also help you retain your best employees and increase their loyalty to the company. By providing a retirement plan and a share in the company’s success, you show your employees that you value their contributions and are invested in their future. This investment can go a long way in building a positive company culture and keeping your best workers on board.
  • Flexibility 
    A 401(k) with a profit-sharing plan also offers flexibility in terms of how you allocate contributions. For example, you could choose to make a flat percentage contribution to all employees’ accounts, or you could base the contribution on factors such as job performance or tenure. You can customize the plan to meet the needs of your business and provide incentives to motivate employees to work hard and stay with the company long-term. 
  • Attract New Employees 
    In addition to retaining existing employees, offering a 401(k) with a profit-sharing plan may attract new talent to your business. Many job seekers consider retirement benefits when evaluating job offers, and a strong benefits package can help your company stand out in a competitive marketplace. 
  • Improved Financial Wellness  
    By providing a retirement savings plan, you’re also helping your employees improve their financial wellness. It’s no secret, and studies have even proven that financial stress can impact employee productivity and engagement. So, offering a plan that helps alleviate stress contributes to a more focused mindset that can positively benefit your employees and your business. 

Practical Steps to Implement These Plans

So, you like the benefits of this combination? Let’s discuss how you would implement it. Here are the steps to establish or modify your current 401(k) plan, if you have one, and add a profit-sharing plan.


1. Research and consult a professional
First, research to make sure this is the best option for you and your company. Consult with a financial advisor or retirement plan specialist to help you determine if this type of plan will best suit your needs. 

2. Determine your plan’s criteria
Next, you need to determine the eligibility requirements and contribution amounts. Do you want to make the plan available to all employees? Or do you want to limit participation to specific groups of employees based on tenure or age?

3. Formalize a document that outlines your plan 
Create a document for your business that outlines the rules and guidelines of the 401(k) and profit-sharing plans, including the eligibility requirements, contribution amounts, vesting schedules, and distribution rules. 

4. Set up the plan with a financial institution 
Once you have your plan document, you can set up the account with a financial institution. 

5. Enroll employees and educate them about plans  
Once your account is set up, you will enroll eligible employees and educate them about the plan’s benefits and contribution options.

6. Monitor your plan 
Retirement plans need ongoing monitoring and possible modifications. 

For example, you may need to adjust the contribution amounts, change the investment options available to employees, or modify the eligibility requirements. 

7. You can modify your plan if needed  
If, at some point, you want to modify your plan, such as increasing the employer contribution percentage or adding a new investment option, you will need to amend the plan document and notify plan participants of the changes. 

8. Ensure your plan complies with all regulations  
Finally, as the plan sponsor, it is your responsibility to ensure the plan complies with all applicable laws and regulations, such as ERISA and IRS guidelines. We recommend conducting plan audits and compliance reviews periodically to ensure the plan remains compliant. 

In conclusion, I hope you can see how a 401(k) with a profit-sharing plan can offer many benefits for you and your employees. From increased retirement savings and tax benefits to improved employee retention and financial wellness, this type of plan can help your business succeed while taking care of your employees. It’s worth considering as part of your overall benefits package.  

Check back for our next blog in our ongoing series, as we will discuss SEP and Simple IRAs next time. 

Chris Zeches is a Certified Financial Planner® and Managing Partner at Zeches Wealth Management. Zeches Wealth Management has one singular focus: To financial planning and tax expertise to help multi-generational families and business owners achieve more of what they love.

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