When you establish a profit sharing plan, you must take certain basic actions. One of your first decisions will be whether to set up the plan yourself or to consult a professional or financial institution – such as a bank, mutual fund provider, or insurance company – to help with establishing and maintaining the plan.

In addition, there are four initial steps for setting up a profit sharing plan:

• Adopt a written plan document,
• Arrange a trust for the plan’s assets,
• Develop a recordkeeping system, and
• Provide plan information to employees eligible to participate.

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Adopt a written plan document

Plans begin with a written document that serves as the foundation for day-to-day plan operations. If you have hired someone to help with your plan, that person likely will provide the document. If not, consider obtaining assistance from a financial institution or retirement plan professional. In either case, you will be bound by the terms of the plan document.

A profit sharing plan allows you to decide (within limits) from year to year whether to contribute for participants. The plan document will need to have a set formula to determine how any contributions are allocated to participants’ accounts. Your contributions to the plan can be subject to a vesting schedule which provides that an employee’s right to employer contributions becomes nonforfeitable only after a period of time. You may need to run annual testing to ensure that contributions for rank-and-file employees are proportional to contributions for owners and managers.

Once you have decided on a profit sharing plan for your company, you will have flexibility in choosing some of the plan’s features – such as when and which employees can participate in the plan. Other features written into the plan are required by law. For instance, the plan document must describe how certain key functions are carried out, such as how contributions are deposited in the plan.

Unless it includes a 401(k) cash or deferred feature, a profit sharing plan does not usually allow employees to contribute. If you want to include employee contributions, see 401(k) Plans for Small Businesses (Publication 4222).

A profit sharing plan is for employers of any size.

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Arrange a trust for the plan’s assets

A plan’s assets must be held in trust to assure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions. Since the financial integrity of the plan depends on the trustee, selecting a trustee is one of the most important decisions you will make in establishing a profit sharing plan. If you set up your plan through insurance contracts, the contracts do not need to be held in trust.

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Develop a record-keeping system

An accurate record-keeping system will track and properly attribute contributions, earnings and losses, plan investments, expenses, and benefit distributions. If a contract administrator or financial institution assists in managing the plan, that entity typically will help keep the required records. In addition, a record-keeping system will help you, your plan administrator, or financial provider prepare the plan’s annual return/report that must be filed with the Federal Government.

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Provide plan information to employees eligible to participate

You must notify employees who are eligible to participate in the plan about certain benefits, rights, and features. In addition, a summary plan description (SPD) must be provided to all participants. The SPD is the primary vehicle to inform participants and beneficiaries about the plan and how it operates. The SPD typically is created with the plan document. (For more information on the required contents of the SPD, see Disclosing Plan Information to Participants.)