Aged Based Plans
The contribution is made by the employer to the plan and allocated to the participants based on a formula that gives more weight to the older participants. The contribution may be discretionary or stated as a percent of the profits. No contribution is necessary in years where there are no profits, but a contribution may be made even if there are no profits or accumulated profits. This type of plan may be sponsored by any employer, even those in the non-profit or governmental sectors. Plans sponsored by non-profit or governmental employers are generally referred to as 401(a) plans. These plans may also provide for a 401(k) feature for those employers eligible for 401(k) treatment.
The method used to allocate contributions to the individual participants must be specified in the plan document. There are various methods available to allocate the contributions. The benefit provided at normal retirement age is an account balance. There is no guarantee of benefits at normal retirement.
The non-discrimination tests under the Age Weighted Plan are based on the contributions of the plan being converted to benefit accrual rates as if the Plan were a defined benefit program. The contribution made to each employees’ account is a result not of compensation directly, but of compensation weighted by an age factor. This weighting is accomplished by the following method:
First, testing age is selected. Generally, this is age 65, but it can be another age. If an employee is older than the testing age, the testing age is used as the employee’s current age.
Secondly, the method generally used to assure a fail-safe allocation is the reverse regulatory conversion procedure. This actually the discrimination testing procedure applied in reverse to yield the accrual rate. An interest rate is selected for the conversion from the normal defined contribution testing method to the defined benefit testing method. The interest rate must be between 7.5 and 8.5 percent. The higher rate will usually work better for the older employee. All the compensation amounts of each employee are converted to a weighting factor by using a discounted factor. The longer an employee is away from normal retirement, the lower the factor becomes and thus the smaller the weight. The allocation of the contribution is the division by the weights, and not by compensation directly.
The following chart indicates the allocation between several methods of defined contribution plans.
|Employee||Pay||Age||Age Weight||Age Weight Allocations||Pro Rata||Integrated Formula|
Advantages of Age Weighted Plans
Employers with varying profit levels may make a variable contribution amount, as needed each year. If the employer has older employees that are closer to retirement and the employer wishes to shift available employer contributions for their benefit, they may do so. If the employer has a younger workforce and the participants and owners have a relatively long time to accumulate for retirement, this plan has the flexibility to allow for the varying levels of employer contributions. If the employer desires to have greater portability in benefits, the profit sharing plan provides for an account balance that may be transferred easily. If the employer desires to allow the participants to direct their own asset investments, this plan allows for the participants to profit from good self-direction of their accounts. If the employer desires to shift the risk of asset return to the participants, this plan will place both the risks and rewards of asset return on the shoulders of the participants.
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