Unlocking Strategic Value: Profit-Sharing Retirement Plan Design for Non-Highly Compensated Employees

Retirement plan-based profit-sharing contributions are a powerful—yet underutilized—tool for aligning workforce behavior with business strategy. Most mid-sized U.S. companies (200–500 employees) treat profit-sharing in 401(k) plans as a compliance mechanism or highly compensated employee (HCE) benefit. But when designed intentionally, profit-sharing contributions can directly support long-term strategic goals by engaging non-highly compensated employees (NHCEs).

This white paper explores how a qualified retirement plan’s profit-sharing can become a strategic asset, particularly for organizations seeking to improve retention, reward tenure, drive operational consistency, and prepare workforce transitions. Backed by real-world examples and a review of IRS-compliant design structures, this guide gives CFOs and CEOs a practical framework to better serve the 70–80% of employees who are often excluded from meaningful plan benefits.

Key Insights for Strategic Plan Execution:

1. Most Plans Underserve NHCEs

While 401(k) profit-sharing plans are common, the default design often skews heavily toward HCEs. Pro-rata formulas, integration, and “top-hat” tiers serve compliance and tax efficiency—but rarely deliver meaningful retirement outcomes for the broader employee base. NHCEs often receive token benefits or none at all unless plan design is intentionally rebalanced.

2. NHCE-Focused Profit-Sharing is Rare—but High Impact

Only 5% of workers in the lowest income quartile participate in any profit-sharing arrangement, compared to 10% of those in the top quartile. This gap represents a missed opportunity to reinforce tenure, reduce turnover, and create organizational alignment through financial incentives that support long-term savings.

3. Design Choices Can Deliver Strategic Results

Profit-sharing can be tailored to serve key business objectives:

  • Hours-based contributions benefit part-time or hourly teams with high labor intensity
  • Service-weighted formulas reward loyalty and reduce attrition
  • Pre-retirement glidepath tiers support retirement readiness and workforce planning

4. Safe Harbor + Profit-Sharing Creates Flexibility

Companies can meet compliance requirements through a 3% safe harbor non-elective contribution, while layering in a discretionary profit-sharing component for NHCE-focused allocations. This allows plan sponsors to reward tenure or performance-linked metrics without running afoul of IRS nondiscrimination rules.

5. Business-Aligned Contributions Boost ROI

Strategic profit-sharing design can reduce workforce churn, align employee behavior with EBITDA or safety goals, and support succession planning. For example, increasing contributions for tenured employees or those in mission-critical roles can reduce costly turnover and institutional knowledge loss.

Conclusion

Retirement-based profit-sharing shouldn’t be limited to tax-advantaged contributions for top earners. For CFOs and CEOs pursuing strategic workforce goals, rethinking the design of these plans can turn a back-office function into a front-line performance tool. By shifting the focus toward NHCE inclusion, organizations can amplify retention, align contributions with operational outcomes, and build a more financially secure, strategically aligned workforce.

When structured with intentionality, profit-sharing contributions become more than a benefit—they become a business instrument for executing long-term strategy.

If you are looking for help improving or overcoming challenges with your company 401k or profit sharing plan, please contact Beese Fulmer Private Wealth Management or call 330-454-6555.