Is a 401k or Solo 401k a Profit Sharing Plan?

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Also known as a deferred profit-sharing plan (DPSP), a profit-sharing plan is a retirement plan that gives employees a share in the profits of the company on a quarterly or annual basis.

Contributions to a profit-sharing plan are tied to a company’s profits, rather than an employee’s contribution. Employees receive a percentage of the company profits on a quarterly or annual basis, and can decide how much of its profits to share each year, limited to 25% of the company’s payroll. In a profit-sharing plan, employees cannot make contributions to the plan on their own. Contributions can only be made by the company.

Is a solo 401k or 401k plan a profit-sharing plan?

Retirement plans where employees can make contributions into their own plans, like a solo 401k plan or 401k plan, are not considered profit-sharing plans. In a profit-sharing plan, the company gives employees a portion of the profits based on quarterly or annual earnings, and employees cannot make contributions to their own plans.

In a 401k plan, the company can make contributions to employees’ 401k plans through employer match contributions. However, these are not distributions of the company profits.

In a solo 401k plan, employer contributions are often referred to as profit-sharing contributions, but since a solo 401k is a type of 401k plan that also accepts employee contributions, and is not solely funded by a share of company profits, it is not considered a profit-sharing plan.

401k contribution limits

For 2024, employees can contribute up to 100% of their income, up to a maximum $23,000 to their 401k plans if they’re under 50 years of age. If they’re 50 years of age or older, they can contribute an additional $7,500 as catch-up contributions, bringing their contribution limit up to $30,500.

Technically, the total contribution limit of a 401k plan is $69,000, or $76,500 with catch-up contributions added for people aged 50+. However, employees are limited to contributing only up to the employee contribution limits. If they wish to put more money into the plan, they could choose to make additional contributions to an after-tax 401k. However, not all 401k plans allow after-tax contributions.

Solo 401k contribution limits

For 2023, the solo 401k contribution limit is $69,000 for people under 50 years of age, and $76,500 for people 50 years of age or older.

A solo 401k plan is a 401k plan for individual business owners with no employees, and the business owner can make both employer and employee contributions to the plan. While business owners can contribute up to $69,000 ($76,500 if age 50+) into a solo 401k plan for 2024, like a regular 401k plan, employee contributions are limited to $23,000, with an additional $7,500 in catch-up contributions for people aged 50+, the rest being made with employer contributions.

Profit-sharing plan contribution limits

Employers can contribute up to 25% of the company’s total payroll to a profit-sharing plan. Unlike a 401k or solo 401k, contributions are tied to the company’s profits, but the IRS states that a business is not required to make profits in order to make contributions to a profit-sharing plan.

In addition, profit-sharing contributions can also be added on as a bonus to a regular 401k plan, or to a separate account as an added incentive for employees.

A profit-sharing plan has similar contribution limits to a 401k and solo 401k.

For 2024, a company can contribute the lesser of:

Like a 401k plan, if a company offers a profit-sharing plan, it must be made available for all eligible employees. The IRS lists eligible employees as any worker in the company who is:

And while the company can determine their own vesting schedule for when an employee can access the funds contributed in a profit-sharing plan, the eligible withdrawal age from the retirement plan is similar to a 401k and solo 401k, at 59½ years of age. If contributions are vested, but they are not yet 59½ years of age, the withdrawn funds will be subject to a 10% early distribution penalty tax.