Guest Author: Blake Faust, Director of Retirement at Abbey Street

Congratulations! You’ve had a great year, and profits are high. Now, you’re looking for ways to capitalize on your hard work. One often overlooked tool businesses can leverage is a retirement plan with profit-sharing features. This strategy can provide significant advantages for employers, particularly in maximizing retirement savings and reducing tax liability, while also being an added benefit to your employees.

Maximizing owner benefits

Business owners can supercharge their savings and build their individual wealth in addition to their business through a well-designed profit-sharing plan. One technique, called cross-testing, allows businesses to allocate a higher percentage of contributions to key employees, such as owners and executives, while still meeting nondiscrimination requirements.

Here’s a simple example of how it can work:

While this is an overly simplified illustration, the concept holds true, showing owners can receive the lion’s share of contributions while reducing the total cash outlay into the company retirement plan.

Tax Planning

Profit-sharing is a great option for reducing taxable income for the year. Contributions are tax-deductible and can be made until the business tax return (including extensions) is filed. Also, it’s discretionary, which means employers can adjust contributions based on the company’s performance. This flexibility allows for smart decisions with minimal financial uncertainty.

Recruitment and retention

Offering attractive benefits is essential for hiring top talent. Employees are increasingly looking beyond salary and traditional benefits when considering job offers. When employees see their work directly impacting the company’s success and, in turn, their retirement benefits, they are more likely to feel invested in the company’s mission and align efforts with financial goals.

While profit-sharing can be a powerful tool in a business owner’s tool belt, consulting with experts is important to maximize its potential. Designing these plans is complex and requires careful upfront planning to achieve the desired outcomes. However, once implemented, it can significantly benefit you and your business long-term.