Can a Profit Sharing Plan Have a Fixed Employer Contribution?

[Scott]

I recently came across a 401(k) plan that, in addition to allowing employee deferrals, provides that "each year, the Employer shall make Nonelective Employer Contributions to the Trust for each eligible Active Participant in an amount equal to 4% of such Active Participant’s Compensation." The plan contains no language designating itself as either a profit sharing plan or a money purchase plan. It contains none of the required provisions of a money purchase plan (QJSA, etc.), so the sponsor is apparently taking the position that it is a profit sharing plan. It has received a favorable determination letter.

I have always understood the basic difference between a profit sharing plan and a money purchase plan to be that a profit sharing plan provides for discretionary employer contributions and a money purchase plan provides for mandatory contributions computed as a fixed percentage of compensation. If my understanding is correct, why wouldn't the plan described above be a money purchase plan?

[Leopurrd]

I don't believe that MPP's can have a 401(k) option. Sorry that i can't cite it, but I remember reading that somewhere.

Anyway, 401(k)'s are always a profit sharing plan, although a profit sharing plan isn't necessarily a 401(k) Plan...I'm hoping I make sense here!

Discretionary contributions are the norm in profit sharing plans but there are some crazy folks out there who like to guarantee their employees a contribution once in a while. Also,other profit sharing plans could offer required contributions, in the case of a 401k safe harbor.

[Effen]

Is this a bargained plan?

I have seen some union plans where the bargained contribution gets carried from the contract into the PS document. I'm not saying if it is correct, but I have seen it.

[PLAN MAN]

Yes, a profit sharing plan can have a definite contribution formula, such as an amount equal to 4% of such Active Participant’s Compensation. A discretionary formula is the most common, but not the only type allowed. The plan must designate the type of retirement plan it is, it should say either a profit sharing plan or a money purchase plan. If the name of the plan does not make it clear, I would look at the SPD and the plan document itself for an indication.

A money purchase plan may not include a 401(k) feature unless it was around on June 27, 1974 and is considered a pre-ERISA money purchase plan. A 401(k) feature is usually part of the profit sharing plan. Also, a money purchase plan is required to provide a QJSA, and a profit sharing plan is not.

[Scott]

Thanks for the responses.

Effen, the plan covers bargaining and non-bargaining employees. All non-bargaining employees get the 4%, while some bargaining employees get the 4% and others get something else, depending on what the CBA says.

From what I am reading here, it appears that it is OK for a profit sharing plan to have a fixed contribution. As I mentioned, I've always thought a fixed contribution automatically means a money purchase plan. I guess my concern is that the IRS could look at this plan and say it is a money purchase plan because of the fixed contribution, and it's disqualified because there is no QJSA, there is a 401(k) feature, etc.

Is it fair to say that if the plan clearly states that it is intended to be a profit sharing plan, there should be no problems?

[Guest howie1980]

Thanks for the responses.

Effen, the plan covers bargaining and non-bargaining employees. All non-bargaining employees get the 4%, while some bargaining employees get the 4% and others get something else, depending on what the CBA says.

From what I am reading here, it appears that it is OK for a profit sharing plan to have a fixed contribution. As I mentioned, I've always thought a fixed contribution automatically means a money purchase plan. I guess my concern is that the IRS could look at this plan and say it is a money purchase plan because of the fixed contribution, and it's disqualified because there is no QJSA, there is a 401(k) feature, etc.

Is it fair to say that if the plan clearly states that it is intended to be a profit sharing plan, there should be no problems?

Yes. the difference between a money purchase plan and a profit sharing plan before EGTRRA was the annual 25% deduction limit for a MP plan vs. 15% for a profit sharing plan. Also, profit sharing plans originally needed to have contributions from its profits. However, now there are essentially no differences between MP plans and PS plans except for the QJSA requirement. This is why most employers have been phasing out and/or merging their money purchase plans.

As a matter of fact the only way to truly know which type of plan it is is by what it calls itself. The plan must specify within the plan docuement which type of plan it intends to be - IRC 401(a)(27).