These plans use allocation methods that base contributions on both the age and compensation of eligible employees.
How Do Age-Weighted and Comparability Profit-Sharing Plans Work?
They are similar in concept to defined benefit pension plans, but contributions are discretionary. Treasury regulations allow profit-sharing plan nondiscrimination testing under Section 401(a)(4) to be based on anticipated benefits at retirement, similar to defined benefit plans, rather than on the level of contributions made in that particular year.
Eligibility
Employee eligibility requirements for age-weighted or comparability profit-sharing plans are the same as those for regular profit-sharing plans.
Typically, a profit-sharing plan’s eligibility provisions require employees to have one year of service and be at least 21 years of age. A two-year service period may be imposed if full immediate vesting is provided. For most plans, a year of service is defined as working 1,000 hours in a plan year.
Contributions
In an age-weighted plan, a participant’s age, or length of time until retirement, is factored into the allocation formula on an individual basis, so older participants receive a larger proportionate share of the contribution. The comparability plan allows an employer to select classes of employees that provide for different contribution allocation levels for each group. If the nondiscrimination tests are met, an employer can allocate a larger proportionate share of the company’s contribution to specific employees the employer wishes to benefit the most.
Advantages of an Age-Weighted or Comparability Plan
- An age-weighted plan is beneficial for businesses aiming to favor older, highly paid participants.
- Comparability plans allow an allocation that benefits a specific class of employees, allowing employers to be more targeted in their approach.
- If the favored group is older than other classes of employees (on an aggregated basis), the allocation formula is likely to pass the required nondiscrimination tests.