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The Benefits of an Age-weighted Retirement Plan

The older you are, the less time you have left to save for your retirement. Therefore, if you are the owner or a top manager of a company, you might install an "age-weighted" profit-sharing plan in the company. Reason: Such a plan favors the older plan participants. This type of plan is perfectly legitimate as long as it meets the nondiscrimination requirements for qualified retirement plans spelled out in the tax law.

How it works: All of the basic rules and regulations that apply to regular profit-sharing plans also apply to plans with an age-weighted feature. The plan can have a discretionary plan formula that gives the employer more flexibility than usual-you can even skip contributions in a year altogether, if you choose. Because the age of employees is factored into the formula, this type of plan generally benefits older employees who need to accumulate retirement funds in a hurry.

The contributions are calculated by using the present value of a single life annuity at a specified testing age. This ensures that the plan meets tax law nondiscrimination requirements. A professional adviser can make the necessary calculations.

To give you an idea of the potential benefits, let's take a look at a hypothetical situation.

Example: Mr. Gray is the 50-year-old owner of a small company with six full-time employees. The company contributes $39,000 to the plan for the year based on a testing age of 65. (Note that the interest rate assumptions must fall within certain tax law guidelines. A benefits professional can handle the actual calculations.)

As the highest-paid and oldest employee of the company, Gray receives almost two-thirds of the total contribution to the plan for the year. His contribution represents approximately 63% of the company's entire $39,000 contribution, or $24,547.

Contrast this result with a traditional profit-sharing plan based strictly on compensation. Since Gray's compensation is one-third of the payroll, he would be entitled to one-third of the annual contribution, or $13,000. The age-weighted plan gives Gray an extra contribution of $11,547.

Another version of a profit-sharing plan that can benefit older workers is a new comparability plan. In this type of plan, the contribution percentage formula for one category of participants is greater than the other categories.

Caution: This is not to say that an age-weighted plan is the optimal approach for everyone. Consult with a professional adviser concerning your business.

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	[ return to list ] The Benefits of an Age-weighted Retirement Plan The older you are, the less time you have left to save for your retirement. Therefore, if you are the owner or a top manager of a company, you might install an "age-weighted" profit-sharing plan in the company. Reason: Such a plan favors the older plan participants. This type of plan is perfectly legitimate as long as it meets the nondiscrimination requirements for qualified retirement plans spelled out in the tax law. How it works: All of the basic rules and regulations that apply to regular profit-sharing plans also apply to plans with an age-weighted feature. The plan can have a discretionary plan formula that gives the employer more flexibility than usual-you can even skip contributions in a year altogether, if you choose. Because the age of employees is factored into the formula, this type of plan generally benefits older employees who need to accumulate retirement funds in a hurry. The contributions are calculated by using the present value of a single life annuity at a specified testing age. This ensures that the plan meets tax law nondiscrimination requirements. A professional adviser can make the necessary calculations. To give you an idea of the potential benefits, let's take a look at a hypothetical situation. Example: Mr. Gray is the 50-year-old owner of a small company with six full-time employees. The company contributes $39,000 to the plan for the year based on a testing age of 65. (Note that the interest rate assumptions must fall within certain tax law guidelines. A benefits professional can handle the actual calculations.) As the highest-paid and oldest employee of the company, Gray receives almost two-thirds of the total contribution to the plan for the year. His contribution represents approximately 63% of the company's entire $39,000 contribution, or $24,547. Contrast this result with a traditional profit-sharing plan based strictly on compensation. Since Gray's compensation is one-third of the payroll, he would be entitled to one-third of the annual contribution, or $13,000. The age-weighted plan gives Gray an extra contribution of $11,547. Another version of a profit-sharing plan that can benefit older workers is a new comparability plan. In this type of plan, the contribution percentage formula for one category of participants is greater than the other categories. Caution: This is not to say that an age-weighted plan is the optimal approach for everyone. Consult with a professional adviser concerning your business. [ return to list ]
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