Business owners value their employees and want to reward them for their contributions to the business. One way of doing so is to provide a retirement plan for their employees.
As a business owner, they have more at risk than their employees in the success of the business. When designing a retirement plan, an age-weighted profit sharing plan may be attractive to the business owner.
First, what is a profit-sharing plan? A profit-sharing plan is a type of tax-qualified retirement plan to which an employer can make discretionary contributions on behalf of the company’s employees. Traditionally the employer’s contributions under a profit-sharing plan are weighted according to an employee’s compensation. An age-weighted profit sharing plan is a slightly different breed of retirement plan. As its name suggests, an age-weighted profit-sharing plan is one that takes age into account in the formula for allocating the employer contributions. This should result in higher contributions as an employee reaches retirement age, which is desirable for employers that want to allocate a greater proportion of the employer contribution to the older workers. Employers may also want to do this if the business’s owners are older than the average or if the employer wants to reward longer-term employees in this manner.
Under the Internal Revenue Code and the related Treasury regulations, a profit-sharing plan is required to specify a formula under which the employer contributions are allocated among all employees’ accounts under the plan. There are a number of ways that the employer contributions can be allocated among employees’ accounts and remain in compliance with the law.
In order to allocate benefits in an age-weighted manner and still comply with other rules that govern tax-qualified retirement plans, an age-weighted profit sharing plan must be a “uniform points plan” in which each employee is allocated points based on age, service, and compensation, and the employer contribution is allocated in proportion to each employee’s total points.
In order to establish an age-weighted profit-sharing plan, a special plan document must be drafted (or an existing plan document must be amended) to include these age-weighted provisions. In addition, administration of the plan will be more involved than a regular profit-sharing plan. If this type of plan is not drafted and operated properly it could potentially run afoul of the rules that must be complied with in order for the plan to remain tax-qualified.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, including how to adopt an age-weighted profit-sharing plan, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
We wish to thank CCH Incorporated for its contributions to this posting.
