This type of plan provides for deferred sharing of employer profits with employees. Contributions to the plan are usually discretionary, a feature many employers find desirable if they are not certain how much they can contribute to a plan from year to year. Profit sharing plans may be designed to allocate profits based on a percentage of pay, job classifications or units based on a combination of salary and hours worked.

This type of plan allows for pre-tax employee contributions. The annual individual savings deferral is limited by law to $15,500 for the calendar year 2007. Employees over age 50 may defer an additional "catch-up" amount. Employers may contribute discretionary matching and/or profit sharing contributions. The employer is limited to 25% of total eligible compensation between all forms of contribution, although individuals within the group may have higher contribution rates. Salary deferrals are not included in this limitation. The plan should be communicated in such a way as to encourage high levels of participation, both initially and in the future, by employees at all levels of the organization.

In a Safe Harbor 401(k) Plan, the annual employer contributions are defined as a percentage of compensation. The annual contribution limit for any participant is 25% of his or her total compensation. The annual individual savings deferral is limited by law to $15,500 for the calendar year 2007. Employees over age 50 may defer an additional "catch-up" amount. Under this type of plan the employer has a fixed profit sharing contribution or matching contribution which "buys" the employer out of the complicated discrimination testing under traditional 401(k) Plans.

This plan type pre-defines the dollar amount of employees' retirement benefits. The employer has minimum funding requirements, regardless of profitability. Benefits received at retirement are limited to $180,000 per year. This maximum amount increases each year for cost of living adjustments.