--- title: "Profit-Sharing Plan vs 401(k): A Breakdown for Employers" description: Explore the benefits of profit-sharing plans vs. 401(k)s and how combining them can boost employee satisfaction and loyalty. image: https://blog.axcethr.com/hubfs/profit-sharing-plan-vs-401k-_1200-x-628-px_%20(1).webp --- - [Client Portal](https://www.axcethr.com/client-services/) - [Employee Login](https://www.axcethr.com/client-services/) [![AxcetHR Solutions Blog](https://blog.axcethr.com/hubfs/AxcetHR2021%20Blog/axcethr_logo_white%20(1).png)](https://www.axcethr.com/) - [About Us](https://www.axcethr.com/about-us/) - [Corporate Philantropy](https://www.axcethr.com/about-us/corporate-philanthropy/) - [Meet the Team](https://www.axcethr.com/about-us/meet-the-team/) - [Values and Culture](https://www.axcethr.com/about-us/values-and-culture/) - [Kansas PEO](https://www.axcethr.com/about-us/kansas-peo/) - [Missouri PEO](https://www.axcethr.com/about-us/missouri-peo/) - [Careers](https://axcethrsolutions.prismhr-hire.com/) - [Why Axcet](https://www.axcethr.com/why-axcet/) - [Why Choose Axcet?](https://www.axcethr.com/why-axcet/) - [About PEOs](https://www.axcethr.com/why-axcet/about-peos/) - [PEO Cost](https://www.axcethr.com/peo-cost/) - [Switching PEOs](https://www.axcethr.com/switching-peos/) - [Certified PEO](https://www.axcethr.com/why-axcet/certified-peo/) - [HR Outsource Options](https://www.axcethr.com/why-axcet/outsourcing-options/) - [Client Reviews](https://www.axcethr.com/why-axcet/client-reviews/) - [PEO Services](https://www.axcethr.com/services/) - [Human Resources](https://www.axcethr.com/services/human-resources/) - [Employee Benefits](https://www.axcethr.com/services/employee-benefits/) - [Payroll Services](https://www.axcethr.com/services/payroll-and-tax-administration-services/) - [Workers' Comp. and Employee Safety Risk Management](https://www.axcethr.com/services/workers-comp-and-employee-safety-risk-management/) - [Expertise](https://www.axcethr.com/expertise/) - [PEO Expertise You Can Trust](https://www.axcethr.com/expertise/) - [Resource Library](https://www.axcethr.com/expertise/resource-library/) - [Subscribe to the Blog](https://www.axcethr.com/subscribe-to-the-latest-resources/) - [Blog](https://blog.axcethr.com) - [Schedule a Consultation](https://www.axcethr.com/schedule-consultation/) - [Why Axcet](https://www.axcethr.com/why-axcet/) - [Client Reviews](https://www.axcethr.com/why-axcet/client-reviews/) - [Why Choose Axcet?](https://www.axcethr.com/why-axcet/) - [About PEOs](https://www.axcethr.com/why-axcet/about-peos/) - [Certified PEO](https://www.axcethr.com/why-axcet/certified-peo/) - [Options to Outsource Human Resources](https://www.axcethr.com/why-axcet/outsourcing-options/) - [Services](https://www.axcethr.com/services/) - [Complete List of Services](https://www.axcethr.com/services/) - [Human Resources](https://www.axcethr.com/services/human-resources/) - [Employee Benefits](https://www.axcethr.com/services/employee-benefits/) - [Risk Management](https://www.axcethr.com/services/risk-management/) - [Payroll Administration](https://www.axcethr.com/services/payroll-and-tax-administration-services/) - [Expertise](https://www.axcethr.com/expertise/) - [Expertise You Can Trust](https://www.axcethr.com/expertise/) - [Resource Library](https://www.axcethr.com/expertise/resource-library/) - [Blog](https://blog.axcethr.com/) - [Subscribe to the Blog](https://www.axcethr.com/subscribe-to-the-latest-resources/) - [About Us](https://www.axcethr.com/about-us/) - [Community Involvement](https://www.axcethr.com/about-us/community-involvement/) - [Meet the Team](https://www.axcethr.com/about-us/meet-the-team/) - [What We Stand For](https://www.axcethr.com/about-us/what-we-stand-for/) - [Careers](https://axcethrsolutions.prismhr-hire.com/) - [Client Portal](https://www.axcethr.com/client-services/) - [Employee Login](https://www.axcethr.com/client-services/) [![fuel-blog-logo](https://blog.axcethr.com/hs-fs/hubfs/fuel-blog-logo.png?width=310&height=97&name=fuel-blog-logo.png)](https://blog.axcethr.com) Filter Blog by Topic - [Human Resources](https://blog.axcethr.com/topic/human-resources) - [Payroll Administration](https://blog.axcethr.com/topic/payroll-administration) - [Employee Safety & Risk Management](https://blog.axcethr.com/topic/employee-safety-risk-management) - [Employee Benefits](https://blog.axcethr.com/topic/employee-benefits) - [All about COVID-19 in the Workplace](https://blog.axcethr.com/topic/covid19) - [Kansas & Missouri HR News](https://blog.axcethr.com/topic/kansas-and-missouri-hr-news) - [Kansas City Interest News](https://blog.axcethr.com/topic/kansas-city-interest-news) - [PEO/HRO](https://blog.axcethr.com/topic/peo) - Choose Topic: - [Human Resources](https://blog.axcethr.com/topic/human-resources) - Payroll Administrations - [Employee Safety & Risk Management](https://blog.axcethr.com/topic/employee-safety-risk-management) - [Employee Benefits](https://blog.axcethr.com/topic/employee-benefits) - [PEO](https://blog.axcethr.com/topic/peo) # Profit-Sharing Plan vs 401(k): Which Employee Retirement Plan is Best? By [Jeanette Coleman, SPHR & SHRM-SCP](https://blog.axcethr.com/author/jeanette-coleman) on [May 08, 2024](https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers) 5 min read [0 comment(s)](https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers#comments-listing) Share this: - - - - [whatsapp://send?text=https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers](whatsapp://send?text=https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers) - [mailto:?subject=Profit-Sharing%20Plan%20vs%20401(k):%20A%20Breakdown%20for%20Employers&body=https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers](mailto:?subject=Profit-Sharing%20Plan%20vs%20401(k):%20A%20Breakdown%20for%20Employers&body=https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers) ![profit-sharing-plan-vs-401k (1)](https://blog.axcethr.com/hs-fs/hubfs/profit-sharing-plan-vs-401k%20(1).webp?width=1200&height=800&name=profit-sharing-plan-vs-401k%20(1).webp) If you’re interested in funding retirement accounts as a benefit for your employees, you’re on the right track in maintaining a loyal, satisfied workforce. When choosing between a profit-sharing plan vs 401(k), you can’t make a bad choice. In fact, you don’t have to choose at all. As a company, you’re permitted to both fund a profit-sharing plan and sponsor a 401(k) plan at the same time. As we'll discuss, you can even combine the two plans.  If you’re a business owner who's curious about the differences between the retirement plans and wants to compare the two, Axcet HR Solutions’ employee benefits consultants have answers. In this post, we’ll break down the differences between these popular plans and help you determine what course of action is best for your organization.  ## What is a Profit-Sharing Plan?  A profit-sharing plan is a tax-advantaged retirement savings account run by an employer for its employees. The employer is the only party who can contribute to the account—the employees themselves do not contribute, but may maintain other personal retirement accounts.  RELATED: [Building an Effective Compensation Strategy in Uncertain Times >>](https://blog.axcethr.com/building-an-effective-compensation-strategy-in-uncertain-times) ## How Does a Profit-Sharing Plan Work?  When an organization maintains a profit-sharing plan as a retirement benefit for its eligible employees, it contributes to the employees’ accounts in a uniform, pre-determined way. There are several allocation methods for profit-sharing plan contributions.  The organization may decide, for example, that it will contribute 5% of each employee’s salary, or 7% of all of the company’s profits, to the employees’ accounts in accordance with the employee’s salary. It’s common for employers to utilize the “comp-to-comp” method of calculating profit share contribution plans for each employee. The comp-to-comp method involves allocating a total sum of money (i.e., 5% of an organization’s profits) to employees based on the proportion their salary represents of the company’s total payroll.  While the name of the plan implies that the contribution percentage must be based on the organization’s profits, that isn’t necessarily true. Employers may also choose to award employees company stock rather than cash.  [![New call-to-action](https://no-cache.hubspot.com/cta/default/2652187/7115a763-c1d6-498c-82af-b9f35b1e5fda.png)](https://cta-redirect.hubspot.com/cta/redirect/2652187/7115a763-c1d6-498c-82af-b9f35b1e5fda) ## Benefits of Profit-Sharing Plans for Employers  Businesses of any size may participate in profit-sharing contribution plans. Many employers believe their team members are motivated by profit-sharing plans and are encouraged to achieve greater results for the organization in order to increase contributions.    There are also potential tax benefits to contributing to profit-sharing plans. Employers may be able to deduct compensation paid during the taxable year to participants from their corporate taxes—check on your ability to deduct your contributions with an experienced [employee benefits consultant](https://www.axcethr.com/services/employee-benefits/).    According to the [Internal Revenue Service (IRS)](https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-profit-sharing-plan#:~:text=Contribution%20limits,living%20adjustments%20for%20later%20years\).), as of 2024, employers may contribute the lesser of 100% of an employee’s total compensation or $69,000.00. This figure is subject to adjustment in subsequent years based on the cost of living and has gone up each year in recent records. There is no minimum for how much money employers should contribute to profit-sharing plans.  Note: Employers that decide to offer profit-sharing plans must file a Form 5500 each year.  RELATED: [Unique Employee Benefits: The New Norm for Attracting Top Talent? >>](https://blog.axcethr.com/progressive-organizations-are-stealing-your-employees-with-these-emerging-benefits)  ## Profit-Sharing Plan vs 401(k): What's the Difference?  When deciding whether to offer a profit-sharing plan, an employer-sponsored 401(k), or both, it’s helpful to understand the plans’ key similarities and differences. Consider the following:  ### How Profit-Sharing and 401(k) Plans Differ  - #### Contribution mechanisms Employer matching contributions are made differently in profit-sharing plans vs 401(k) accounts. In a profit-sharing plan, the employer contributes a predetermined amount of money to the employee’s retirement accounts.   With a 401(k), an employee can determine how much they’d like to contribute (within certain limits), and employers may match their contributions up to a certain percentage.  - #### Contribution limits Depending on an employee’s compensation, higher contributions may be made to profit-sharing accounts than 401(k) plans.  While profit-sharing plans are capped at the lesser of 100% of an employee’s compensation or $69,000.00 in 2024, 401(k) plan contributions are usually capped at $23,000.00 for tax-deductible contributions.  - #### Vesting periods With profit-sharing plans, contributions are commonly subject to vesting schedules, meaning that employees may not be able to access funds until they’ve served certain pre-set lengths of tenure with the company.  While employer contributions to 401(k) plans may be subject to vesting schedules, employee contributions are often immediately fully vested and accessible to employees.  ### How Profit-Sharing and 401(k) Plans Are Alike  - #### Tax advantages Both types of retirement plans are both tax-advantaged and offer tax-deferred growth. Contributions to either type of plan are made on a pre-tax basis.  - #### Investment structure Both types of retirement accounts have the same basic structure: they are investment portfolios holding a mix of securities assets and include stocks, bonds, ETFs, mutual funds and so on.  - #### Roll-over abilities Both types of retirement plans offer eligible participants the ability to roll over their funds into another qualified retirement account. This means that if they leave their employment with you, they can bring vested funds with them.  [![New call-to-action](https://no-cache.hubspot.com/cta/default/2652187/43b7e131-f21e-4698-92fe-48b852954d2c.png)](https://cta-redirect.hubspot.com/cta/redirect/2652187/43b7e131-f21e-4698-92fe-48b852954d2c) ## Combining Profit-Sharing Plans and 401(k)s While it’s possible to offer a standalone profit-sharing plan or 401(k) plan, combining profit-sharing and 401(k) plans is a popular way to give your employees the benefits of both types of retirement accounts.  Employees can reap the rewards of their own contributions to a 401(k) plan, and give themselves a level of predictability and reliability through their own 401(k) funding—and your employer match amounts. When combined with a profit-sharing plan, employees can also benefit directly from the success of the company and may be incentivized to push harder toward the achievement of organizational goals as a result.  Combining profit sharing and 401(k) plans can also help employers cut back on the burden involved in plan administration.  RELATED: [Ask the Expert - How Long to Keep Payroll Records >>](https://blog.axcethr.com/ask-the-payroll-expert-how-long-to-keep-payroll-records) ## [![Affordable small business 401k plans with expert support managed by Axcet HR Solutions](https://no-cache.hubspot.com/cta/default/2652187/interactive-189259368785.png)](https://blog.axcethr.com/hs/cta/wi/redirect?encryptedPayload=AVxigLJTrtHT4zl%2FPEoAXd9zhH2RTrvBCyF3dKIlf0ABC7UJqKhm0DUIYQYrpe5A0zmJpSaKAds%2Bngx3joS9Uv4g7wQzgxC1ZbbCC1Gfb8FHNgWxumUcHzK5VzXc5fmw4wPq9ihx2PZc0J0MiNuf7VEIBxd4S9PAalpLqS6G3ey5L7I9Xx4oXANcOCxF5ph3dcEZtoPpAFhXLkNy3Jbz9T3094mgXEQix3CusTkM3fNSCVK2JQInkf85XQC4xJAHAzt%2B4HE%2FIkkJC1tJ1k%2FFXCqfVoFP1I90aQ%3D%3D&webInteractiveContentId=189259368785&portalId=2652187) ## Ready to Revisit your Retirement Benefits? Axcet HR Solutions can Help  At Axcet HR Solutions, we believe that employees of all organizations should have access to Fortune 500-level benefits and that offering these benefits should be affordable for small businesses and mid-sized businesses.  When you partner with Axcet, you’ll find experts on your side who are dedicated to locating the right benefits for your organization, its employees, and its unique culture. Interested in learning more about the retirement benefits options your business can provide to its employees? [Schedule a consultation](https://www.axcethr.com/schedule-consultation/) with the experienced [employee benefits consultants](https://www.axcethr.com/services/employee-benefits/) at Axcet HR Solutions today.  **Secure Your Team’s Future – and Your Own** Empower your employees to plan for retirement with confidence. Discover how Axcet’s 401(k) retirement plan benefits and advisory services can help you attract and retain top talent while simplifying plan administration. 👉 [Explore 401(k) Benefits with Axcet](https://www.axcethr.com/services/employee-benefits/401k-retirement-plan-benefits/) [![PEO small business employee benefits](https://no-cache.hubspot.com/cta/default/2652187/db22d902-d10d-4bc1-b684-4c8856b86c66.png)](https://cta-redirect.hubspot.com/cta/redirect/2652187/db22d902-d10d-4bc1-b684-4c8856b86c66) [![Jeanette Coleman, SPHR & SHRM-SCP](https://blog.axcethr.com/hs-fs/hubfs/Jeanette-04.jpg?width=80&height=80&name=Jeanette-04.jpg)](https://blog.axcethr.com/author/jeanette-coleman) Written by #### [Jeanette Coleman, SPHR & SHRM-SCP](https://blog.axcethr.com/author/jeanette-coleman) Jeanette Coleman, SPHR, SHRM-SCP, is the Director of Human Resources at Axcet HR Solutions, where she has contributed her expertise for over 21 years. As a leader in the HR industry, she holds advanced certifications as a Senior Professional in Human Resources (SPHR) and SHRM-Senior Certified Professional (SHRM-SCP). Jeanette oversees HR strategy and operations, ensuring Axcet delivers exceptional HR services that help small and mid-sized businesses stay compliant and grow. With a Master’s degree in Human Resource Management from Keller Graduate School and a Bachelor of Science in Business Administration from Kansas State University, Jeanette is well-equipped to lead and support clients in navigating complex HR challenges. Throughout her 15-year tenure as Director of Human Resources, she has been instrumental in positioning Axcet as the Midwest’s largest and premier Professional Employer Organization (PEO). Her previous roles at Axcet include Director of Employee Benefits and Senior HR Consultant, where she gained extensive experience in HR outsourcing, and employee risk management. Jeanette’s expertise has been recognized through industry and regional publications. She co-authored the article “High-Touch in the Age of High-Tech: How PEOs Can Embrace AI Without Losing Their Humanity” (https://peoinsider.org/articles/high-touch-in-the-age-of-high-tech-how-peos-can-embrace-ai-without-losing-their-humanity/) for PEO Insider (March 2026), alongside Jo McClure, and was featured in Ingram’s Magazine in a Q&A (https://ingrams.com/article/qa-with-jeanette-coleman/) discussing generational change, technology, and workplace culture. These contributions reflect her perspective on balancing innovation with the human side of HR. Jeanette’s leadership reflects her deep commitment to helping businesses thrive through strategic, compliance-driven HR solutions. Through her writing, she shares insights on HR strategy, compliance, and best practices to help employers confidently manage their workforce. Published in: PEO Insider and Ingram's Read more [View all posts →](https://blog.axcethr.com/author/jeanette-coleman) ### Get HR Updates ### Table of Contents #### [Is Your Anti-Harassment Policy Effective in the Eyes of the EEOC? ![anti harassment policy](https://blog.axcethr.com/hubfs/anti-harassment-policy-_1200-x-628-px_%20(1).webp)](https://blog.axcethr.com/anti-harassment-policy-a-guide-to-eeoc-2024-updates) #### [![employee wellbeing](https://blog.axcethr.com/hubfs/employee-wellbeing-_1200-x-628-px_%20(1).webp) Maximizing Employee Wellbeing: Key Strategies for a Prosperous 2024](https://blog.axcethr.com/employee-wellbeing-in-2024) ## Let us know what you think... ![AxcetHR Blog](https://blog.axcethr.com/hubfs/AxcetHR2021%20Blog/axcethr_logo_white%20(1).png) - [Why Axcet](https://www.axcethr.com/why-axcet/) - [What We Stand For](https://www.axcethr.com/about-us/what-we-stand-for/) - [Expertise](https://www.axcethr.com/expertise/) - [Employee Benefits](https://www.axcethr.com/services/employee-benefits/) - [Human Resources](https://www.axcethr.com/services/human-resources/) - [Payroll Services](https://www.axcethr.com/services/payroll-and-tax-administration-services/) - [Risk Management](https://www.axcethr.com/services/workers-comp-and-employee-safety-risk-management/) - [Meet the Team](https://www.axcethr.com/about-us/meet-the-team/) - [Subscribe to Latest Resources](https://www.axcethr.com/subscribe-to-the-latest-resources/) - [Resource Library](https://www.axcethr.com/expertise/resource-library/) - [\[ Client Portal \]](https://www.axcethr.com/client-services/) - - - - - Search for: Copyright © 2023 Axcet HR Solutions – Kansas City's PEO Since 1988 | [Privacy Policy](https://www.axcethr.com/privacy-policy/) | [Terms and Conditions](https://www.axcethr.com/terms-conditions/) | [**Join our Team – Careers »**](https://axcethrsolutions.prismhr-hire.com/) 10975 Grandview Drive Suite 200, Corporate Woods Building 27, Overland Park, KS 66210 | Call us: 913-383-2999 *The IRS does not endorse any particular For more information on [certified professional employer organizations](https://www.axcethr.com/why-axcet/certified-peo/), go to [www.irs.gov](https://www.irs.gov).* Remove cookies ![](https://dc.ads.linkedin.com/collect/?pid=43031&fmt=gif) ```json { "@context" : "https://schema.org", "@type" : "BlogPosting", "author" : { "@type" : "Person", "name" : "Jeanette Coleman, SPHR & SHRM-SCP", "url" : "https://blog.axcethr.com/author/jeanette-coleman" }, "dateModified" : "2025-08-05T16:57:10.054Z", "datePublished" : "2024-05-08T20:43:25.000Z", "headline" : "Profit-Sharing Plan vs 401(k): A Breakdown for Employers", "image" : [ "https://blog.axcethr.com/hubfs/profit-sharing-plan-vs-401k-_1200-x-628-px_%20(1).webp" ], "mainEntityOfPage" : { "@id" : "https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers", "@type" : "WebPage" }, "publisher" : { "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://blog.axcethr.com/hubfs/_logo_axcethr_primary.png" }, "name" : "Axcet HR Solutions" } } ``` ```json { "@context" : "https://schema.org", "@id" : "https://www.axcethr.com/#organization", "@type" : "Organization", "address" : { "@type" : "PostalAddress", "addressCountry" : "US", "addressLocality" : "Kansas City", "addressRegion" : "MO" }, "aggregateRating" : { "@type" : "AggregateRating", "bestRating" : "5", "ratingValue" : "5", "reviewCount" : "100" }, "areaServed" : { "@type" : "Country", "name" : "United States" }, "award" : [ "IRS Certified Professional Employer Organization (CPEO)", "Award-Winning HR Solutions Provider", "SHRM Certified HR Professionals", "HRCI Certified HR Professionals" ], "contactPoint" : { "@type" : "ContactPoint", "areaServed" : "US", "availableLanguage" : "English", "contactType" : "Customer Service" }, "description" : "Award-winning Professional Employer Organization (PEO) providing comprehensive HR solutions, payroll services, employee benefits, and risk management to small and mid-sized businesses. Founded in Kansas City in 1988 with 35+ years of expertise.", "foundingDate" : "1988", "foundingLocation" : { "@type" : "Place", "address" : { "@type" : "PostalAddress", "addressCountry" : "US", "addressLocality" : "Kansas City", "addressRegion" : "MO" } }, "hasOfferCatalog" : { "@type" : "OfferCatalog", "itemListElement" : [ { "@type" : "Offer", "itemOffered" : { "@type" : "Service", "description" : "Comprehensive HR management services including recruitment, retention, performance management, and company culture development", "name" : "Human Resources Management" } }, { "@type" : "Offer", "itemOffered" : { "@type" : "Service", "description" : "Accurate payroll processing and payroll tax filing with dedicated payroll consultants", "name" : "Payroll Processing" } }, { "@type" : "Offer", "itemOffered" : { "@type" : "Service", "description" : "Group employee benefits management including health insurance evaluation, selection, and administration", "name" : "Employee Benefits Administration" } }, { "@type" : "Offer", "itemOffered" : { "@type" : "Service", "description" : "Workplace safety compliance and risk management solutions", "name" : "Risk Management" } }, { "@type" : "Offer", "itemOffered" : { "@type" : "Service", "description" : "Employment law compliance, regulatory reporting, and guidance from employment law attorneys", "name" : "HR Compliance & Legal Support" } } ], "name" : "HR Solutions Services" }, "keywords" : "PEO, Professional Employer Organization, HR Solutions, Human Resources Outsourcing, Payroll Services, Employee Benefits, Kansas City PEO, Small Business HR, Mid-Sized Business HR, HR Consulting, IRS Certified PEO, CPEO", "knowsAbout" : [ "Human Resources Management", "Professional Employer Organization", "PEO Services", "Payroll Processing", "Employee Benefits Administration", "Risk Management", "HR Compliance", "Health Plan Management", "Talent Recruitment", "Performance Management", "Workplace Safety", "Employment Law Compliance" ], "legalName" : "Axcet HR Solutions", "logo" : { "@type" : "ImageObject", "url" : "https://www.axcethr.com/wp-content/uploads/axcet-logo.png" }, "memberOf" : { "@type" : "Organization", "name" : "IRS Certified Professional Employer Organizations" }, "name" : "Axcet HR Solutions", "numberOfEmployees" : { "@type" : "QuantitativeValue", "value" : "50-200" }, "sameAs" : [ "https://blog.axcethr.com" ], "slogan" : "HR Support That Drives Success", "url" : "https://www.axcethr.com" } ``` ```json { "@context" : "https://schema.org", "@id" : "https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers#article", "@type" : "BlogPosting", "alternativeHeadline" : "If you’re interested in funding retirement accounts as a false", "articleBody" : "If you’re interested in funding retirement accounts as a benefit for your employees, you’re on the right track in maintaining a loyal, satisfied workforce. When choosing between a profit-sharing plan vs 401(k), you can’t make a bad choice. In fact, you don’t have to choose at all. As a company, you’re permitted to both fund a profit-sharing plan and sponsor a 401(k) plan at the same time. As we'll discuss, you can even combine the two plans. If you’re a business owner who's curious about the differences between the retirement plans and wants to compare the two, Axcet HR Solutions’ employee benefits consultants have answers. In this post, we’ll break down the differences between these popular plans and help you determine what course of action is best for your organization. What is a Profit-Sharing Plan? A profit-sharing plan is a tax-advantaged retirement savings account run by an employer for its employees. The employer is the only party who can contribute to the account—the employees themselves do not contribute, but may maintain other personal retirement accounts. RELATED: Building an Effective Compensation Strategy in Uncertain Times >> How Does a Profit-Sharing Plan Work? When an organization maintains a profit-sharing plan as a retirement benefit for its eligible employees, it contributes to the employees’ accounts in a uniform, pre-determined way. There are several allocation methods for profit-sharing plan contributions. The organization may decide, for example, that it will contribute 5% of each employee’s salary, or 7% of all of the company’s profits, to the employees’ accounts in accordance with the employee’s salary. It’s common for employers to utilize the “comp-to-comp” method of calculating profit share contribution plans for each employee. The comp-to-comp method involves allocating a total sum of money (i.e., 5% of an organization’s profits) to employees based on the proportion their salary represents of the company’s total payroll. While the name of the plan implies that the contribution percentage must be based on the organization’s profits, that isn’t necessarily true. Employers may also choose to award employees company stock rather than cash. Benefits of Profit-Sharing Plans for Employers Businesses of any size may participate in profit-sharing contribution plans. Many employers believe their team members are motivated by profit-sharing plans and are encouraged to achieve greater results for the organization in order to increase contributions. There are also potential tax benefits to contributing to profit-sharing plans. Employers may be able to deduct compensation paid during the taxable year to participants from their corporate taxes—check on your ability to deduct your contributions with an experienced employee benefits consultant. According to the Internal Revenue Service (IRS), as of 2024, employers may contribute the lesser of 100% of an employee’s total compensation or $69,000.00. This figure is subject to adjustment in subsequent years based on the cost of living and has gone up each year in recent records. There is no minimum for how much money employers should contribute to profit-sharing plans. Note: Employers that decide to offer profit-sharing plans must file a Form 5500 each year. RELATED: Unique Employee Benefits: The New Norm for Attracting Top Talent? >> Profit-Sharing Plan vs 401(k): What's the Difference? When deciding whether to offer a profit-sharing plan, an employer-sponsored 401(k), or both, it’s helpful to understand the plans’ key similarities and differences. Consider the following: How Profit-Sharing and 401(k) Plans Differ Contribution mechanisms Employer matching contributions are made differently in profit-sharing plans vs 401(k) accounts. In a profit-sharing plan, the employer contributes a predetermined amount of money to the employee’s retirement accounts. With a 401(k), an employee can determine how much they’d like to contribute (within certain limits), and employers may match their contributions up to a certain percentage. Contribution limits Depending on an employee’s compensation, higher contributions may be made to profit-sharing accounts than 401(k) plans. While profit-sharing plans are capped at the lesser of 100% of an employee’s compensation or $69,000.00 in 2024, 401(k) plan contributions are usually capped at $23,000.00 for tax-deductible contributions. Vesting periods With profit-sharing plans, contributions are commonly subject to vesting schedules, meaning that employees may not be able to access funds until they’ve served certain pre-set lengths of tenure with the company. While employer contributions to 401(k) plans may be subject to vesting schedules, employee contributions are often immediately fully vested and accessible to employees. How Profit-Sharing and 401(k) Plans Are Alike Tax advantages Both types of retirement plans are both tax-advantaged and offer tax-deferred growth. Contributions to either type of plan are made on a pre-tax basis. Investment structure Both types of retirement accounts have the same basic structure: they are investment portfolios holding a mix of securities assets and include stocks, bonds, ETFs, mutual funds and so on. Roll-over abilities Both types of retirement plans offer eligible participants the ability to roll over their funds into another qualified retirement account. This means that if they leave their employment with you, they can bring vested funds with them. Combining Profit-Sharing Plans and 401(k)s While it’s possible to offer a standalone profit-sharing plan or 401(k) plan, combining profit-sharing and 401(k) plans is a popular way to give your employees the benefits of both types of retirement accounts. Employees can reap the rewards of their own contributions to a 401(k) plan, and give themselves a level of predictability and reliability through their own 401(k) funding—and your employer match amounts. When combined with a profit-sharing plan, employees can also benefit directly from the success of the company and may be incentivized to push harder toward the achievement of organizational goals as a result. Combining profit sharing and 401(k) plans can also help employers cut back on the burden involved in plan administration. RELATED: Ask the Expert - How Long to Keep Payroll Records >> Ready to Revisit your Retirement Benefits? Axcet HR Solutions can Help At Axcet HR Solutions, we believe that employees of all organizations should have access to Fortune 500-level benefits and that offering these benefits should be affordable for small businesses and mid-sized businesses. When you partner with Axcet, you’ll find experts on your side who are dedicated to locating the right benefits for your organization, its employees, and its unique culture. Interested in learning more about the retirement benefits options your business can provide to its employees? Schedule a consultation with the experienced employee benefits consultants at Axcet HR Solutions today. Secure Your Team’s Future – and Your Own Empower your employees to plan for retirement with confidence. Discover how Axcet’s 401(k) retirement plan benefits and advisory services can help you attract and retain top talent while simplifying plan administration. 👉 Explore 401(k) Benefits with Axcet", "author" : { "@id" : "https://blog.axcethr.com/author/jeanette-coleman#author", "@type" : "Person", "name" : "Jeanette Coleman, SPHR & SHRM-SCP", "url" : "https://blog.axcethr.com/author/jeanette-coleman" }, "dateCreated" : "2024-05-08", "dateModified" : "2025-08-05", "datePublished" : "2024-05-08", "description" : "If you’re interested in funding retirement accounts as a benefit for your employees, you’re on the right track in maintaining a loyal, satisfied workforce. When choosing between a profit-sharing plan vs 401(k), you can’t make a bad choice. In fact, you don’t have to choose at all. As a company, you’re permitted to both fund a ...", "editor" : "Jeanette Coleman, SPHR & SHRM-SCP", "genre" : "Human Resources and Employee Management", "headline" : "Profit-Sharing Plan vs 401(k): A Breakdown for Employers", "image" : "https://2652187.fs1.hubspotusercontent-na1.net/hubfs/2652187/profit-sharing-plan-vs-401k-_1200-x-628-px_%20%281%29.webp", "keywords" : "Employee Benefits, profit sharing plan, profit sharing plan vs 401k, employee benefits packages, 401 (k) retirement plan benefits", "mainEntityOfPage" : { "@id" : "https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers", "@type" : "WebPage" }, "publisher" : { "@id" : "https://www.axcethr.com/#organization", "@type" : "Organization", "logo" : { "@type" : "ImageObject", "url" : "https://blog.axcethr.com/hs-fs/hubfs/axcethr_logo_white.png?width=225&name=axcethr_logo_white.png" }, "name" : "Axcet HR Solutions" }, "url" : "https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers", "wordCount" : "7320" } ``` ```json { "@context" : "https://schema.org", "@type" : "BreadcrumbList", "itemListElement" : [ { "@type" : "ListItem", "item" : "https://www.axcethr.com/", "name" : "Home", "position" : 1 }, { "@type" : "ListItem", "item" : "https://insights.axcethr.com/", "name" : "Insights", "position" : 2 }, { "@type" : "ListItem", "item" : "https://insights.axcethr.com/tag/employee-benefits", "name" : "Employee Benefits", "position" : 3 }, { "@type" : "ListItem", "item" : "https://blog.axcethr.com/profit-sharing-plan-vs-401k-a-breakdown-for-employers", "name" : "Profit-Sharing Plan vs 401(k): A Breakdown for Employers", "position" : 4 } ] } ```