Age-weighted Profit-sharing Plan

Definition of "Age-weighted profit-sharing plan"

Written by

JoAnn Martindale

RE/MAX Metro

Plan that combines the simplicity and flexibility of the traditional profit-sharing plan with the best features of the defined benefit plan and the target benefit plan. By age-weighing the plan, higher contributions are permitted by the IRS for older plan participants. Under traditional profit-sharing plans, younger employees will have a larger contribution made by the employer on their behalf, but they are the least likely to be concerned with retirement and would rather have the cash. Age-Weighted Plans offer more flexibility in making contributions. Under defined benefit plans and target benefit plans, a minimum contribution has to be made each year in contrast to the profit-sharing plan. Age-Weighted Plans, as in the case with the traditional profit-sharing plans, limit the employer's maximum deductible contribution to 15% of the participant's compensation. The maximum annual contribution of any plan participant is equal to the lesser of 25% of compensation, or $30,000. There are no minimum required annual contributions or maintenance costs to reflect fees paid for the pension benefit guaranty corporation (PBGC) premiums, federal, or actuarial valuations. A significantly smaller contribution made on behalf of a younger employee will ultimately equal a significantly larger contribution on behalf of an older employee. Because of the effect of compound interest, the contribution on behalf of the younger employee will purchase the same retirement benefit as the contribution on behalf of the older employee.