If you’re based in California—whether you’re an employee or run a growing business—you’ve likely heard about the “401k profit sharing plan” option. But what exactly is it, and why does it matter here in the Golden State? Let’s break it down in simple terms and take a closer look at what it means for you.
What Is a 401(k) Profit Sharing Plan?
A 401k profit sharing plan is a retirement plan that combines the familiar features of a traditional 401(k) with the power of employer profit-based contributions. Here’s how it works:
- Employees can set aside pre-tax money from each paycheck into their 401(k), investing it for retirement.
- Employers decide—typically at year-end—to share a portion of the company’s profits in the form of extra money, which goes into each employee’s 401(k) account.
Unlike a fixed “matching” program (where an employer matches employee contributions up to a specified percentage), profit sharing allows employers the flexibility to contribute varying amounts annually, depending on how the business performs
How Does It Work in Practice?
- Business earns profits
- Employer decides on a profit-sharing amount (a percentage of profits, payroll, or a flat dollar sum)
- Contributions are allocated to employee accounts based on a formula (e.g., proportionally to salary)
- Contributions are tax-deductible for the business, and pre-tax for employees
There are different types of profit-sharing allocations:
- Pro‑rata, where everyone gets the same percentage of salary
- Age‑weighted, giving older employees a larger share
New‑comparability, allowing different contribution rates for different employee groups
Contribution Limits
For 2025, total annual contributions (employee + employer) can be up to the lesser of:
Employees can also make catch-up contributions if they’re 50 or older (up to $7,500 this year).
Why It Matters in California
A. Low Retirement Participation
A 2019 University of California, Berkeley study found that 6 out of 10 private-sector workers in California don’t have an employer-sponsored retirement plan. That leaves many without a clear path to retire. A profit-sharing 401(k) can help bridge that gap by offering an extra incentive to save.
B. CalSavers Context
With the state-mandated CalSavers program, employers with five or more employees must either offer their own retirement plan (like a 401(k) with profit sharing) or default to CalSavers by June 30, 2022—and those with 1–4 employees will need to register by Dec 31, 2025. Adding a profit-sharing 401(k) allows businesses to both comply and offer a stronger benefit to employees.
C. Tax Perks for Businesses
Employer contributions are tax-deductible, reducing taxable income for the company. Plus, since profit sharing is discretionary, businesses aren’t locked into yearly commitments—a big plus during lean years .
Benefits for California Employees
- Boosted retirement savings: Extra contributions can add tens of thousands of dollars over a career.
- Stronger engagement: Employees feel more invested in the company’s success.
- Flexibility: Even in tough years, the employer can choose to reduce or skip profit sharing—unlike fixed match programs .
Key Legal and Regulatory Points for California
- Plan Document Required
– Must clearly state contribution methods and eligibility. - Nondiscrimination Testing
– Tests ensure contributions aren’t skewed toward business owners. - IRS Form 5500 Filing
– Annual reporting required for compliance. - Unemployment Impact
– Withdrawing funds counts as income and may reduce unemployment benefits. - CalSavers Exemption
– A 401(k) profit sharing plan means you’re exempt from CalSavers rules. - Vesting Schedules
– Employers often impose 1–5 year schedules before employees fully own contributions.
How to Get Started
- Talk to a retirement plan advisor: Experts like HR pros or financial firms can help set one up.
- Design plan: Choose allocation type, vesting schedule, and participation criteria.
- File documents: Draft plan documents and update the Summary Plan Description.
- Annual maintenance: Conduct nondiscrimination tests and file Form 5500.
- Communicate: Inform employees, hold education sessions, and track contributions.
Latest Data & Trends
- Total U.S. assets in 401(k) plans: over $6.4 trillion (2019)
- California private sector has low participation—only about 52% had retirement assets in 2014
- CalSavers deadlines approaching for small businesses mandates action by Dec 31, 2025
Final Thoughts
A 401k profit sharing plan brings big benefits to both California businesses and employees:
- Employees receive boosted retirement savings tied to business growth
- Employers gain flexibility, tax deductions, and a tool to retain talent
- California goals: Improves low retirement participation and offers an employer-led alternative to CalSavers
By adopting a combined 401(k) with profit sharing, companies can do well by doing good—supporting employees and building a financially secure future for all.
For Californians asking, “Is a 401k profit sharing plan right for me?”—the answer is a strong yes. It’s practical, tax-smart, and aligned with California’s mission to improve retirement security. Whether you’re an employee aiming to retire with confidence, or a business owner seeking talent and tax efficiency, this retirement tool is designed for your success.
