What occurs if an employer does not set a fixed contribution rate in a profit-sharing plan?

In a profit-sharing plan, unless a fixed contribution rate is explicitly established, the employer retains significant flexibility regarding contribution levels. This means the employer is not bound to a specific percentage but can choose to contribute any amount within a range defined by the plan document, typically anywhere from 0% to a specified maximum limit, which is often around 25% of eligible compensation.

This flexibility allows employers to adjust their contributions based on the company's profitability for that fiscal year. Therefore, as the business's financial performance varies, employers have the option to not contribute at all in less profitable years or to contribute closer to the maximum allowed in more profitable years. This design is inherent to profit-sharing plans, as they aim to incentivize both employee performance and align employee interests with the overall success of the company.

In contrast, options suggesting that no contributions can be made or that contributions are automatically defined do not align with the fundamental nature of profit-sharing arrangements. Thus, the flexibility in setting contribution rates is what makes this arrangement beneficial for employers.