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Age-weighted profit sharing plan.

Pension plans, both defined contribution (money purchase and target benefit) and defined benefit, require that the employer make recurring annual contributions. These annual obligations can be avoided with profit sharing plans. Under a traditional profit sharing plan employer contributions are generally allocated each year to employees in proportion to relative compensation, either with or without Social Security integration. However, with an age-weighted profit sharing plan the participant's age is taken into account when making these allocations. The results are similar to those produced in target plans, with significantly larger allocations (as a percentage of compensation) to older employees, but with the added flexibility of a profit sharing plan (e.g., fixed annual contributions are required under a target plan, but there is no such requirement under an age-weighted profit sharing plan).

One of the most common types of age-weighted profit sharing plans is the "cross tested" or "new comparability" plan. The name is derived from the cross testing that is used in order to satisfy the nondiscrimination regulations. An age-weighted plan that discriminates as to contributions may be permissible, provided it does not discriminate when compared to benefits that could be provided using the benefits testing. With respect to defined contribution plans, cross testing is an "end justifies the means" or "benefit justifies the contribution" test. It is permissible for a profit sharing plan to fail the non-discrimination tests for defined contribution plans, provided it actually produces nondiscriminatory benefits using the nondiscrimination tests applicable to defined benefit plans. Final regulations define three methods under which a cross tested defined contribution plan can satisfy the nondiscrimination in amount requirement.

To summarize, compared to defined benefit plans and other pension plans (both money purchase and target benefit), profit sharing plans offer the flexibility of not having to make annual contributions, but age-weighted profit sharing plans offer the additional advantage of providing significantly larger allocations to older employees.

See also, the discussion of qualified retirement plans on page 508.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
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