This type of plan allows employers to make tax-deductible contributions at their full discretion, based on profitability for the year. They are very flexible and do not require any ongoing commitment from the employer, unlike most other plans.
However, much like SEPs, any contributions to the plan must benefit all eligible employees proportionately, and contributions are limited to 25% of each employee’s compensation, up to $53,000 in 2015 and 2016. There are many ways to calculate the percentage that should be allocated to each employee, and the required testing for non-discrimination can be complex and somewhat expensive.
For more info on Profit Sharing Plans, click here.