How is contribution rate determined in a profit-sharing plan?

In a profit-sharing plan, the contribution rate is indeed variable and can range from 0% to a certain maximum, which is typically capped at a percentage of the employee's compensation, such as 25%. This flexibility allows employers to contribute a different percentage each year based on the company's profitability and financial conditions. The variable nature of contributions is a key feature of profit-sharing plans, as it aligns employee benefits with the organization’s performance and profitability.

While some plans may define a specific contribution rate in the plan document, which would make that option seem plausible, most profit-sharing plans do grant employers the discretion to adjust contributions based on financial performance, thus emphasizing variability. Additionally, basing contributions on factors like years of service or setting a minimum contribution rate does not accurately capture the essence of the profit-sharing model, which is designed to reward employees based on the organization's financial success rather than specific individual metrics or rigid requirements.