Can a Company Have a 401k and a Profit Sharing Plan? Yes, Here’s How
POINTS
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A company can combine a 401(k) with profit sharing to increase employee retirement benefits.
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Employees can contribute up to $24,500, while total combined contributions can generally reach $72,000.
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Profit sharing gives employers flexibility to contribute more in strong years or skip contributions when business is slower.
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Employers can use profit sharing to provide retirement benefits beyond a standard 401(k) match.
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Contributions can be allocated using formulas based on employee pay and other approved methods.
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Combined plans must meet IRS contribution limits, testing, vesting, and other compliance requirements.
A 401(k) plan can include a profit-sharing feature, allowing employees to make elective contributions while the employer makes additional contributions.
The IRS permits a profit-sharing plan to include a 401(k) feature, subject to applicable qualification and contribution rules.
How a 401(k) and Profit Sharing Work Together
A 401(k) and profit-sharing arrangement can work together to build retirement savings through a combination of employee contributions and additional employer contributions.
| Step | What Happens | 401(k) | Profit Sharing |
|---|---|---|---|
| 1. Employee contributes | Employee chooses how much of their paycheck to save. | Employee money | — |
| 2. Employer matches | Employer may match some of the employee’s 401(k) contribution. | Employer money | — |
| 3. Employer adds profit sharing | Employer may make an additional contribution based on the plan’s formula. | — | Employer money |
| 4. Money is invested | Contributions are invested through the retirement plan. | Employee + employer contributions | Profit-sharing contribution |
| 5. Vesting applies | Employer contributions may be subject to the plan’s vesting schedule. | Employee contributions are generally 100% vested; employer contributions may not be. | May be subject to vesting |
| 6. Retirement savings grow | Contributions and investment earnings accumulate over time. | ||
| 7. Retirement distribution | Employee eventually takes distributions according to the plan and tax rules. | Retirement benefit | Retirement benefit |
The employee contributes through the 401(k), while the employer may add matching and/or profit-sharing contributions, allowing both sources of funding to grow together toward retirement.
401(k) vs. Profit-Sharing Plan
While both are tax-advantaged retirement plans, 401(k) and profit-sharing features serve different roles:
| Feature | 401(k) Plan | Profit-Sharing Plan |
|---|---|---|
| Main purpose | Helps employees save for retirement | Helps employers provide additional retirement money |
| Who contributes? | Employee, and possibly employer | Employer |
| Employee contribution | Employee puts money from their paycheck into the plan | Employee generally does not contribute |
| Employer contribution | Employer may match employee contributions or add other money | Employer may add money based on the plan’s formula |
| How much is contributed? | Employee chooses how much to contribute, subject to plan rules | Employer generally decides how much to contribute |
| Required every year? | Employee contributions depend on employee elections | Employer contributions are generally optional |
| Based on company profits? | No | Not necessarily |
| Vesting | Employee contributions are always theirs; employer contributions may have a vesting schedule | Employer contributions may have a vesting schedule |
| Can they work together? | Yes | Yes — a profit-sharing plan can include a 401(k) feature |
| Easy way to remember | You save | Employer adds |
A 401(k) and profit-sharing plan can work together to provide retirement savings from both employee contributions and employer contributions.
Can You Sign Up for a 401(k) Anytime?
Wondering when you can start a 401(k)? Learn when you can enroll, what rules may apply, and what to do if you missed your employer’s signup window.
See When You Can EnrollCan You Have Two Separate Retirement Plans?
Yes, a company may technically maintain two separate qualified plans (e.g., a 401(k) plan and a separate profit-sharing plan).
| Retirement Plan Combination | Can You Have Both? | What to Know |
|---|---|---|
| 401(k) + IRA | Yes | You can contribute to both, but each has its own rules and limits. |
| 401(k) + 401(k) | Yes | You may have two 401(k)s through different employers, but your employee contributions generally share one annual limit. |
| 401(k) + Profit Sharing | Yes | They can work together, with employee 401(k) contributions and employer profit-sharing contributions. |
| 401(k) + 457(b) | Yes | A 457(b) generally has a separate employee deferral limit. |
| Two plans with the same employer | Sometimes | Special rules apply when coordinating multiple plans maintained by the same employer. |
But IRS rules and ERISA generally treat a controlled group of employers as a single employer for testing and coverage.
So, if two plans cover employees of the same employer or an affiliated group, the nondiscrimination tests typically must be applied as if one combined plan.
Contribution Limits and Catch-Ups
The following table lists the IRS contribution and compensation limits that apply to 401(k) and profit-sharing plans for 2024 through 2026.
| Contribution Limit | 2024 | 2025 | 2026 |
|---|---|---|---|
| 401(k) employee contributions | $23,000 | $23,500 | $24,500 |
| Age 50+ catch-up | $7,500 | $7,500 | $8,000 |
| Age 60–63 catch-up | — | $11,250 | $11,250 |
| Total plan contributions | $69,000 | $70,000 | $72,000 |
| Compensation limit | $345,000 | $350,000 | $360,000 |
Employee elective deferrals are subject to the annual limit, while employee and employer contributions generally count toward the separate annual additions limit; catch-up contributions are excluded from the limit.
Why Add Profit Sharing to a 401(k)?
There are several strategic reasons a small employer might attach a profit-sharing feature to its 401(k) plan:
- Tax benefits: Employer profit-sharing contributions are a deductible business expense. In a profitable year, the employer can make a large contribution and enjoy the current tax deduction; in a lean year, it can reduce or skip the contribution.
- Recruitment and retention: Offering profit-sharing can make a retirement plan more attractive. Employees receive an extra pool of retirement money beyond their own deferrals, aligning their interests with the company’s success.
- Flexibility: The company is never obligated to put in a fixed amount each year. The plan can be designed with a variable formula, giving management the flexibility to adjust contributions for cash flow.
- Owner compensation strategy: Especially in owner-heavy businesses, profit-sharing allows owners/highly compensated employees to receive a larger share of contributions.
So, profit-sharing on top of a 401(k) gives employers a tax-savvy way to boost retirement benefits, fine-tune contributions by year, and help satisfy nondiscrimination requirements without extra payroll tax on employees.
Profit-Sharing Allocation Methods
The plan document must specify how a profit-sharing pool is divided among participants. Common formulas include: uniform percentage (pro rata), age-weighted, new comparability (cross-tested), and Social Security–integrated (permitted disparity). Each has its own pros and cons:
| Method | How It Works | Main Advantage | Main Drawback |
|---|---|---|---|
| Pro Rata (Uniform) | Everyone receives the same percentage of pay. For example, a 10% contribution gives an employee earning $50,000 a $5,000 contribution. | Simple and easy to understand. Everyone receives the same percentage of compensation. | Less flexibility for giving larger contributions to older or higher-paid employees. |
| Age-Weighted | Contributions are based on pay and age, so older employees generally receive a larger contribution as a percentage of pay. | Can provide larger contributions to employees who are closer to retirement. | More complex and generally requires additional nondiscrimination testing. |
| New Comparability (Cross-Tested) | Employees are placed into groups or classes that can receive different contribution rates. The plan must pass applicable nondiscrimination testing. | Highly flexible and can allow larger contributions for owners or other targeted groups. | More complex to design and administer and requires cross-testing. |
| Social Security–Integrated (Permitted Disparity) | Uses a base contribution rate up to an integration level and an additional rate on compensation above that level, subject to IRS rules. | Can provide somewhat larger allocations to employees with compensation above the Social Security taxable wage base. | More complicated than a simple percentage-of-pay formula and offers less targeting flexibility than new comparability. |
Many plans default to a simple pro rata formula for ease of compliance.
If a more complex method is chosen, the plan must be tested accordingly.
Example: 401(k) + Profit Sharing for a Small Business
ABC offers a 401(k) with a 3% safe-harbor match. The company then adds a discretionary profit-sharing plan, contributing 12% of pay for the owner and 5% for each other employee, using a new-comparability allocation approach.
The first-year contribution breakdown and employer cost below assume that all employees participate fully enough to receive the full 401(k) match.
| Employee Role | Employee Type | Salary | PS Allocation Rate | Profit-Sharing | SH Match % | 401(k) Match | Total Employer Contribution | Employer Deduction (25%) |
|---|---|---|---|---|---|---|---|---|
| Owner | Owner | $100,000 | 12% | $12,000 | 3% | $3,000 | $15,000 | $3,750 |
| Manager | Staff | $50,000 | 5% | $2,500 | 3% | $1,500 | $4,000 | $1,000 |
| Staff 1 | Staff | $40,000 | 5% | $2,000 | 3% | $1,200 | $3,200 | $800 |
| Staff 2 | Staff | $30,000 | 5% | $1,500 | 3% | $900 | $2,400 | $600 |
| Totals | — | $220,000 | — | $18,000 | — | $6,600 | $24,600 | $6,150 |
Impact:
- ABC Co. contributes $24,600 to its profit-sharing plan.
- The owner receives $12,000 as a retirement contribution.
- Employees receive $1,500–$5,000 each, depending on the plan’s allocation formula.
- The allocation formula allows the company to provide a larger contribution to the owner while still providing meaningful retirement benefits to employees.
- Employer contributions may be subject to a vesting schedule, meaning employees may earn ownership of those contributions over time.
- ABC Co. may generally deduct qualifying employer contributions, subject to applicable tax-deduction limits.
(This example assumes all employees qualify and participate; actual plan design would check coverage and adjust.)
401(k) and Profit-Sharing Plan FAQs
Yes, a company can combine employee 401(k) contributions and employer profit-sharing contributions in a single plan, which is usually simpler to administer.
Employee 401(k) and Roth contributions are immediately 100% vested, while employer matching and profit-sharing contributions vest according to the plan’s schedule.
No, profit-sharing contributions are generally discretionary unless the plan requires them, so an employer can contribute $0 in a given year.
Generally, profit-sharing contributions can be made by the employer’s tax-return deadline, including extensions, while employee 401(k) deferrals must come from payroll during the year.
No, profit-sharing contributions generally are not taxed when made because they remain in the retirement plan and grow tax-deferred until withdrawn.
Profit-sharing contributions count as employer contributions for testing, and targeted allocation formulas must generally pass IRS nondiscrimination tests.
The plan document should specify eligibility, vesting, contribution formulas, and allocation methods, and participants generally must receive a Summary Plan Description.
If a plan fails required testing, the employer may need to refund excess contributions or make additional contributions, depending on the type of failure.
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