What Are Profit Sharing Plans? Employee Retirement Plan Type

What Are Profit Sharing Plans?

By Kailey Hagen – Updated Aug 29, 2025 at 12:24 PM | Fact-checked by Margo Winton Parodi

Key Points

Profit sharing plans let employers contribute to employee retirements, but employee contributions aren't allowed.
Contributions from employers can be a fixed amount or vary and may include company stock.
Vesting rules apply; some plans offer immediate vesting, others may have a waiting period.

A profit sharing plan is a type of retirement savings plan that enables workers to share in their company's profits. Businesses of all sizes can offer profit sharing plans. But, unlike most types of retirement accounts, workers cannot make their own contributions to these plans.

If your employer offers a profit sharing plan, it can decide whether to put money into your plan and how much to contribute. But companies must establish a set formula to determine how they will calculate contributions. For example, the company may decide to contribute up to 5% of each qualifying employee's salary.

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Profit Sharing Plan Type	Plan Description
Flat dollar amount	Employers contribute the same amount to every employee's account. For example, each employee might receive $2,000.
Pro rata/Salary proportional	Each participant receives a percentage of their annual income. For example, everyone might get 5% of their salary.
New comparability plan/Cross testing	Plan participants are divided into classes or groups, each of which has a unique contribution formula. With this approach, highly compensated employees can't receive a disproportionately higher benefit (as a percent of pay) if the company wants to retain tax benefits.
Age-weighted	Contributions are higher for older employees.
Permitted disparity method/Social Security integration plan	Because Social Security benefit amounts are calculated only on income up to the wage base limit ($168,600 in 2024 and $176,100 in 2025), this method allows for larger contributions on income above this limit.

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About the Author

Kailey Hagen, CFP, is a contributing Motley Fool retirement analyst covering Social Security, Medicare, and retirement planning. Before The Motley Fool, Kailey was a research analyst for Reviews.com focusing on credit and banking products. She is a Certified Financial Planner® and holds a bachelor’s degree in English from the University of Wisconsin-Madison.

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