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• Simplified
Employee Pension (SEP)
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Simple IRA
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Profit Sharing
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Age-weighted/comparablility profit
sharing plans
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401(k) profit sharing
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Safe-harbor 401(k)
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Owner only/one-person 401(k)
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Defined benefit pension |
Age-weighted or Comparability (cross-tested)Profit Sharing
Plans
These plans utilize allocation methods that base contributions on
both the age and compensation of eligible employees, similar in concept
to a defined benefit pension plan, but with discretionary contributions.
Treasury regulations adopted in 1991 allow profit sharing plan non-discrimination
testing under Section 401(a)(4) to be based on anticipated benefits
at retirement, similar to defined benefit plans, as opposed to the
level of contributions made in that particular year, as defined contribution
plans had been required to do in the past.
Eligibility
Employee eligibility requirements for age-weighted or comparability
profit sharing plans are the same as those for regular profit sharing
plans.
Contributions
In an age-weighted plan, the 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 the employer
to select classes of employees that provide for different contribution
allocation levels for each group. If the non-discrimination tests
are met, the employer can allocate a larger proportionate share of
the company’s contribution to specific employees the employer
wishes to benefit the most.
Advantages
An age-weighted plan may be appropriate if a business wants to favor
older, highly paid participants. Comparability plans allow an allocation
that benefits a specific class of employees. If the favored group
is, on an aggregated basis, older than other classes of employees,
the allocation formula is likely to pass the required non-discrimination
tests.
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