Online Guide to
Age Weighted Profit Sharing Plans

Of the various and sundry IRS approved retirement plans available for business, partnerships and sole proprietorships little used is the Age Weighted Profit Sharing Plan and the relatively recent New Comparability Profit Sharing Plan (see below).

From the owners and longer term highly compensated employees perspective these particular plans offer very favorable allocations of company funded contributions to them in comparison to other plans, such as: Company Simple IRAs, SEP-IRA's, 401k/a> Plans, 403B’s, Simple 401ks, Money Purchase Plans, etc.

Depending on a number of variables, this allocation of company funded contribution can go as high as 90% to the owners and other longer term highly compensated individuals. Effectively, unlike some other IRS approved retirement plans these particular plans are designed to be "allocationally discriminatory" and to favor the owner and other highly compensated and longer term employees.

The logic for allowing this type of "discriminatory" contribution runs something like this. The percent of allocation of the tax deductible company contributions for a 25 year old employee with 40 years to retirement should not be the same as the tax deductible company contribution for a 55 year old with only 10 years to retirement BECAUSE the younger employee has the additional benefit of 30 extra years for the monies to compound and grow. Remember the "Rule of 72"?

Basically, these particular plans use a "discounted present value analysis", and a "formula of allocation" which considers this difference in "time to retirement" and salary and then equates these values at retirement. The result is that older pre-retirees need a greater share of the company contribution than the younger pre-retirees to be "financially comparable" when they both retire.

Funding alternatives for these types of retirement plans is similar to the choices available for other types of IRS approved retirement plans: i.e., stocks, mutual funds, variable annuities, no load-variable annuities, bonus-variable annuities, annuities etc.

Any business, whether a corporation, partnership or sole proprietorship can establish an Age-Weighted Profit Sharing Plan.

You set the eligibility requirements at the time the plan is established. If they wish, the employer can restrict individuals with less than 1 year service, union members, non US citizens, part-time workers etc., from being eligible for the plan.

Each year, at the employer's discretion, the employer can contribute up to 15% of the total eligible payroll into the plan for the benefit of the eligible employees.

This total contribution is then allocated to each participants account based on an age-salary weighted formula. Consequently it is possible for the older, higher salaried owners, and non-owners to directly receive 85-90% of the total dollars allocated to the plan.

Employees are vested in the plan based on a vesting schedule established by the employer.

Should an employee leave the firm, his/her vested interest is then simply rolled into the departed individual's personal IRA. (Withdrawals before age 59 1/2 maybe subject to 10% penalty). The remaining interest is forfeited and allocated to the remaining plan members on an age weighted basis.

Employees can make their own decisions as to where they want to invest contributions among investment choices made available by the plan.

The IRS has authorized age-weighted plans in regulations under Code Section 401(a)(4). However, at present there are no prototype plan documents available for Age-Weighted Profit Sharing Plans. Rather, completed documentation of the plan must be submitted to IRS directly for their approval on each plan.

New plans can be started or if you have an existing profit sharing plan you can change to an Age-Weighted plan with a simple amendment. You can also supplement an existing plan with an Age-Weighted Plan.

A total Age-Weighted Profit Sharing Plan design, plan installation and plan maintenance can be provided from various sources.

Variable Annuities have internal expense charges, administrative fees, and mortality expense. Most Variable Annuities, (excluding No load Variable Annuities) typically have declining surrender charges should the contract be totally surrendered over the first several years. Please see, prospectus for details.

Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit. All of these investments can loss money.

All Mutual Funds, Variable Annuities and Variable Life Insurance policies are offered by prospectus ONLY. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest. Mutual Fund, Variable Annuity and Variable Life prospectuses are available directly from the issuing companies when product information is requested, and in some cases, they be downloaded directly on the issuing company's internet website.

The tax deferral characteristic associated with variable annuities is not needed when used in an account that is by definition tax deferred (retirement accounts) and according to some sources variable annuities generally have higher fees and internal expenses than mutual funds.

Systematic and dollar cost averaging within Mutual Funds, Variable Annuities and Variable Life insurance policies does not assure a profit and does not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue purchases through periods of low price levels.

Any business, whether a corporation, partnership or sole proprietorship can establish a New Comparability Profit Sharing Plan.

You set the eligibility requirements at the time the plan is established. If they wish, the employer can restrict individuals with less than 1 year service, union members, non US citizens, part-time workers etc., from being eligible for the plan.

Each year, at the employer's discretion, the employer can contribute up to 15% of the total eligible payroll into the plan for the benefit of the eligible employees. This total contribution is then allocated differently to two categories of employees. The preferred group and the non-preferred group.

The plan can be structured such that the non-preferred group receives a set percentage of their compensation, with the bulk of the contribution going to the preferred owner’s group.

Consequently it is possible for the older, higher salaried owners, to directly receive 85-90% of the total dollars allocated to the plan.

Employees are vested in the plan based on a vesting schedule established by the employer.

Should an employee leave the firm, his/her vested interest is then simply rolled into the departed individual's personal IRA. (Withdrawals before age 59 1/2 maybe subject to a penalty.) The remaining interest is forfeited and allocated to the remaining plan members on a specified basis.

Employees can make their own decisions as to where they want to invest contributions among different choices.

There are certain costs associated with these type plans.

For specific information on how we can assist you in addressing a wide range of age weighted retirement plan related issues and concerns, please complete and transmit the form found below.