Profit sharing is a discretionary contribution you can make to your employees' 401(k) accounts. This article explains how profit sharing works, which formulas are available, key deadlines, and how to submit a contribution.
Profit sharing is a discretionary, pre-tax contribution you can make to your employees' 401(k) accounts after the end of the plan year. Despite the name, your organization does not need to have made a profit to make profit-sharing contributions — the amount and timing are entirely at your discretion.
Key things to know about profit sharing:
Contributions are tax-deductible, typically for the previous tax year.
There is no minimum contribution amount.
Employees can get profit sharing even if they do not personally contribute to the plan.
Contributions do not count toward participants' annual deferral limit.
Vesting schedules may be applied, which can help incentivize employee retention.
Note: If your business is part of a legally related group, you may be required to contribute profit sharing across all entities involved. If you make a profit-sharing contribution to a safe harbor 401(k) plan, the plan may become subject to top-heavy minimum contribution requirements. Learn more about top-heavy plans.
Profit sharing is available on Gusto 401(k) Core and Premium plans. It is not available on Starter plans.
You can confirm whether your plan includes profit sharing and which formulas are available on the Settings page of your 401(k) administrator dashboard.
If you are on a Starter plan, you may be eligible to upgrade to a Core or Premium plan to access profit sharing. For questions about your options, contact support.
There are three profit-sharing formulas available. The right formula depends on your business goals and workforce demographics.
The comp-to-comp formula (also known as the pro-rata formula) allocates a fixed contribution amount to employees in equal percentages based on their relative compensation. This is the default profit-sharing formula for Gusto 401(k) plans.
Example: Atmos Inc. contributes $10,000 in profit sharing. Total eligible employee compensation is $200,000. Each participant gets a contribution equal to 5% of their compensation.
The flat-dollar formula gives every eligible employee the same contribution amount regardless of compensation.
Example: Atmos Inc. contributes $10,000 in profit sharing across three employees. Each gets $3,333.
New comparability — also known as the cross-tested formula — is the most flexible and complex option. It allows you to allocate different contribution amounts to different employees or groups, making it possible to provide higher contributions to older, higher-compensated owners or employees.
This formula may be a good fit if:
Your goal is to maximize contributions to specific highly compensated employees (HCEs)
Targeted individuals are generally older than non-highly compensated employees (NHCEs)
Targeted individuals get higher compensation than NHCEs
You have stable workforce demographics
Important: New comparability requires compliance testing to confirm contributions do not discriminate against non-highly compensated employees (NHCEs). Gusto Retirement handles all required testing — any allocation we calculate will pass these tests.
New comparability is included in Premium plans and available for an additional fee on Core plans.
New comparability plans need to satisfy two tests.
Test 1: Minimum gateway contribution
All NHCEs getting nonelective contributions need to get a minimum gateway contribution. To pass, each eligible NHCE's allocation needs to be the lesser of:
One-third of the highest HCE's contribution rate, or
5% of the participant's compensation
Note: For safe harbor 401(k) plans that make a nonelective contribution, the nonelective contribution can offset all or part of the minimum gateway contribution.
Test 2: Nondiscrimination using the general test
The general test confirms the formula is not discriminatory. For new comparability, we use each participant's equivalent benefit accrual rate (EBAR) — an estimate of what their contribution will be worth at retirement — rather than their actual allocation rate. This lets the plan account for future earnings and time to retirement when comparing HCE and NHCE benefits.
How EBARs are determined
Each participant's EBAR is calculated using an anticipated rate of return on investments and an actuarial factor based on age, projected to an assumed retirement age. Because EBAR accounts for time to retirement, employers can often make higher contributions to older employees — who are closer to retirement — than to younger employees with more years ahead.
How rate groups are tested
Once EBARs are determined, participants are grouped into rate groups — each consisting of one HCE and any participants with an EBAR equal to or greater than that HCE. Each rate group is then tested individually using either:
Rate group test (RGT): The ratio of NHCEs benefiting in each rate group needs to be 70% or more of the ratio of HCEs in that group
Average benefits percentage test (ABPT): The average EBAR for all NHCEs needs to equal or exceed 70% of the average EBAR for all HCEs — often a less expensive option
Gusto Retirement always uses the most beneficial testing method for each allocation.
To process a profit-sharing contribution, we need:
Employee compensation and, if applicable, owner self-employment income
The total tax-deductible profit-sharing contribution you want to make
The bank account and date you want the funds withdrawn
Profit-sharing contributions need to be made before your business tax filing deadline to be deductible for the prior tax year. We will publish a profit-sharing task on your administrator dashboard in the first quarter after getting your compensation data.
Deadlines by entity type
Partnerships and S-corporations: Mar. 15 (extension Sep. 15)
C-corporations and sole proprietorships: Apr. 15 (extension Oct. 15)
Tax-exempt organizations: May 15 (extension Nov. 15)
Note: If the 15th falls on a weekend or holiday, the deadline moves to the next business day.
Before submitting, confirm your plan includes the profit-sharing formula you want to use under Settings in your 401(k) administrator dashboard.
When you're ready, complete the profit-sharing task published on your dashboard. After you submit, we will provide a confirmation notice for your review before processing contributions.
Processing times
Flat-dollar and pro-rata: generally 1 business day
New comparability: at least 2 weeks
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal, or financial advice that considers all relevant facts and circumstances. Consult a qualified financial adviser or tax professional before relying on the information provided here.