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What Is It?

An age-weighted profit-sharing plan is a defined contribution profit-sharing plan where contributions are allocated based on the age of plan participants as well as on their compensation, allowing older participants with fewer years to retirement to receive much larger allocations (as a percentage of current compensation) to their accounts than younger participants.

In a traditional profit-sharing plan, allocations are based on the compensation of plan participants without reference to age. By contrast, an age-weighted profit-sharing plan is a defined contribution plan in which contributions are allocated based on projected benefits at retirement age — the allocations are based on the age of plan participants as well as their compensation.

Because an age-weighted plan is permitted to use the projected retirement benefits at retirement age to allocate current contributions to plan participants, an age-weighted plan can be nondiscriminatory even though two employees earning the same amount have a different contribution made for each of them (because they are not the same age). Simply put, older participants need larger contributions to attain their projected retirement benefit since there are fewer years for those contributions to grow until the older participants reach retirement age. That means that two participants, of different ages, earning the same amount can have different contribution allocations since the younger participant has more years for his contributions to grow until retirement age.

Tip: This type of plan allows older participants (usually the owners and/or key employees) with fewer years until retirement to receive much larger allocations to their accounts each plan year than younger participants so that each participant has the same projected retirement benefit (as a percentage of current compensation) at the plan's retirement age. These plans use the same type of benefit accruals and calculations you see under defined benefit plans where two plan participants earning the same amounts will have different sized contributions depending their ages — older participants need larger contributions since there are fewer years for those contributions to grow for them. Age-weighted plans may also use years of service or a combination of age and years of service to calculate contributions.

Caution: Age-weighted plans are not the same as new comparability plans. Although both types of plans may be adopted for the same purpose (to increase contributions to certain employees, usually older employees with higher compensation levels), new comparability plans have one extra component to calculate allocations — employees are also grouped into categories and each category may have a different contribution formula.

Tip: Unlike money purchase, target, and defined benefit plans, an age-weighted profit-sharing plan, like other profit sharing plans, allows you the flexibility to determine how much or how little you want to contribute to the plan each year (subject to maximum contribution limitations as well as the requirement that, overall, contributions must be recurring and substantial). Consequently, if your business is not doing well, you can decide not to contribute one year and if business turns around down the road, you can decide to make a contribution for that year and subsequent years.

Why Age-Weighted Plans Can Be Nondiscriminatory

Because older workers frequently earn more money than younger workers, you might be concerned as to whether age-weighted plans violate the nondiscrimination principles that prohibit highly paid employees from benefitting more from a qualified plan than lesser-paid employees. Contributions aren't the only way to make a comparison for nondiscrimination purposes — the IRS regulations permit benefits to be compared, too.

IRC Section 401(a) (4) provides that for a plan to be qualified, the "contributions or benefits provided under the plan [must] not discriminate in favor of highly compensated employees." In 1991, the IRS issued extensive regulations describing how qualified employer plans can prove they are nondiscriminatory. Two basic approaches are permitted by these regulations — either a plan can be designed to meet a safe harbor (thereby trading design flexibility for nondiscrimination certainty), or a plan can have a non-safe harbor design, requiring regular testing under the "general nondiscrimination rules." The general nondiscrimination rules allow defined contribution plans to be tested either by examining the current dollar contribution made to employees each year, or by converting those contributions into equivalent benefits, essentially looking at the benefit a particular dollar contribution today would provide at the plan's normal retirement age using certain actuarial assumptions. This latter approach is referred to as "cross-testing." That is, contributions are converted to equivalent benefit accrual rates (EBARs), which are then tested for nondiscrimination in a manner similar to the testing of defined benefit plans. Additional final regulations issued in 2001 provided specific guidance for plans using the cross-testing approach.

The typical age-weighted profit-sharing plan is designed to automatically satisfy these general nondiscrimination rules, using cross-testing, by providing each employee with a dollar contribution that results in the same EBAR for all participants. Because all participants have the same EBAR, the plan is automatically nondiscriminatory. For this reason, age-weighted profit-sharing plans are often said to meet an "implicit safe harbor." In order to provide benefits that will be equally valuable to all employees at retirement age (that is, to provide the same EBAR for all employees), older workers must get larger immediate contributions compared to younger workers. This is because of the time value of money — older workers have less time for those contributions to grow into the projected benefit at normal retirement age. This is the fundamental principle behind age-weighted profit-sharing plans. The time value of money concept can be demonstrated by the following example:

Example(s): Mary and John decide that they each want to save enough money to have $1,000 at age 65. Mary is 50 years old and John is 30 years old. Assuming an 8.5% rate of return, Mary needs to set aside $294 today to have $1,000 15 years later at age 65. In contrast, John needs to set aside only $58 today to have the same $1,000 35 years later at age 65. These dollar amounts and calculations demonstrate how different amounts can grow to equivalent amounts depending upon how long they grow and the growth rate. These examples are hypothetical and for illustrative purposes only. Investment returns will fluctuate; there can be no guarantee that any stated rate of return will be achieved.

Example Comparing Projected Retirement Benefits and Current Contributions

Here's an example to show how projected benefits are not discriminatory even though different sized contributions are made for employees of different ages:




Annual Benefit at Age 65

Contribution This Year

Benefit at Age 65 as % of Current Compensation













Note that although Sam and Larry earn the same amount, the contribution for Sam is more than 10 times the size of the contribution for Larry due to Sam having fewer years to accumulate enough for his retirement benefit. However, for both Sam and Larry, the projected retirement benefit at age 65 for each of them is 10% of their current compensation ($1,000 retirement benefit divided by $10,000 compensation).

Also note that the benefit at age 65 as a percentage of current compensation is the same for Sam and Larry — 10%. They both have the same "equivalent benefit accrual rates" (EBARs). With age-weighted plans, the EBARs are the same for all participants. That's not the case with new comparability plans.

Plan Design

The age-weighted design can be used in a number of ways:

  1. The employer may know the dollar amount it wants to contribute on behalf of a particular key employee. The employer would convert that dollar contribution to an EBAR, using actuarial tables. Then, the contribution necessary to result in the same EBAR would be determined for each other employee, based on that employee's compensation and age.
  1. The employer may know the total dollar amount it wants to contribute to the plan for a plan year. The cross-testing rules would then be used to allocate that contribution to all employees based on their age and compensation (with the resulting EBAR identical for each employee).
  1. The employer may wish to fund a career average benefit type retirement benefit (e.g., 3% of compensation each year). The cross-testing rules would be used to determine the allocations necessary to produce an EBAR for each employee based on his or her age and compensation.

IRS Cross-Testing Regulations

Plans are not allowed to discriminate in favor of highly compensated employees (HCEs). Under the final regulations, a defined contribution plan can test on a benefits basis (that is, use cross-testing) if it:

  1. Provides broadly available allocation rates, or
  2. Provides age-based allocations, or
  3. Passes a gateway requiring allocation rates for non-highly compensated employees to be at least 5% of pay or at least 1/3 of the highest allocation rate for highly compensated employees — this applies for new comparability plans

Age-weighted plans fall under the second option (and therefore do not need to pass the gateway test) if they have a "gradual age or service schedule." A plan has a gradual age or service schedule if the schedule of allocation rates under the plan's formula is available to all employees in the plan and (a) the schedule defines a series of bands based solely on age, years of service, or points representing the sum of age and years of service, and (b) the allocation rates under the schedule "increase smoothly" at regular intervals. The rules are designed to be sufficiently flexible to accommodate a wide variety of age- and service-based plans. To meet the "increase smoothly" requirements:

  1. Each band (age range of participants receiving the same allocation rate) must be uniform (e.g., 10 year bands — grouping ages 25 to 34 together in one band or group and grouping age 35 to 44 in another band or group) except for the last band (e.g., age 65 and older — this is not a 10-year band).
  1. The increases for each band are smooth increases if (1) the allocation rate for the current band is no more than an additional 5% than the prior band (see the table below) where the allocation rate change between bands (age groups) is never higher than 5% (e.g., 16% and then 21% between the last two bands) and (2) the ratio between the allocation rate for the current band and the prior band [e.g., divide the allocation rate for ages 25 to 34 — 6% — by the allocation rate for the prior band (under age 25 — 3%)] is not more than 2.0 (or, if less, the ratio of allocation rates for the two prior bands). All of the bands have to pass the smooth increase test to avoid having to meet the gateway contribution test. See the example below that shows an age formula that meets the age-based plan allocation requirements.

Band of Participants' Ages

Allocation Rate

Ratio of Allocation Rate of This Band as Compared to the Prior Band

Under 25



25 to 34



35 to 44



45 to 54



55 to 64



65 and older



Note: If this plan were subject to the minimum allocation gateway for new comparability plans, the plan would not meet either (1) the 5% minimum contribution test (the under age 25 band is receiving 3%) or (2) the NHCE (non-highly compensated employees) receiving at least 1/3 of highest HCE (highly compensated employee) allocation test (the under age 25 and age 25 to 34 bands are receiving less than 1/3 of the 21% allocation for the 65 and older group). However, the plan meets the requirements for age-weighted plans.

Although age-weighted plans are simpler to administer than new comparability plans, age-weighted plans do have their complexities. That is why professional advice is required for plan design and operation. For example, there can be circumstances (e.g., where top-heavy minimum contribution must be made for a "non-key employee" and the top-heavy minimum allocation is higher than the age-weighted allocation) where an age-weighted plan would need to be tested under the final regulations for nondiscrimination purposes.

When Can It Be Used?

Generally, Any Employer Can Adopt an Age-Weighted Profit-Sharing Plan

Whether you are a large company, a tax-exempt organization, or a sole proprietor, you can set up an age-weighted profit-sharing plan. The best candidate for this type of plan, however, is a business whose principals:

  • Want annual contribution flexibility of a profit sharing plan, and
  • Are older, on average, than their employees, and
  • Want a larger share of the plan contributions allocated to their own accounts

Request Guide TRG

How Do You Implement It?

A number of complex rules govern age-weighted profit-sharing plans. Consequently, you will probably need a pension specialist to help you develop and maintain a plan. In setting up and maintaining the plan, you will need to:

  • Determine the plan features most appropriate for your business
  • Have calculations done each year to determine the correct allocation of contributions
  • Choose the plan trustee
  • Choose the plan administrator
  • Submit the plan to the IRS for approval
  • Adopt the plan during the year in which it is to be effective
  • Provide a copy of the summary plan description to all eligible employees
  • File the appropriate annual report with the IRS


You Can Make Larger Retirement Benefit Contributions for Older Employees Who Are Plan Participants

Because the plan is age-weighted, the annual allocation for an older worker is affected (upward) by age.

You Can Decide Each Year How Much You Can Afford To Contribute To the Plan

Unlike money purchase, target, and defined benefit plans, an age-weighted profit-sharing plan, like other profit sharing plans, allows you the flexibility to determine each year how much or how little you want to contribute to the plan each year (subject to maximum contribution limitations as well as the requirement that, overall, contributions must be recurring and substantial).

Consequently, if your business is not doing well, you can decide not to contribute one year and if business turns around down the road, you can decide to make a contribution for that year and subsequent years.

Your Contributions Are Tax Deductible

You may deduct contributions you make to the plan up to 25% of the total compensation of all plan participants in the year in which you make the contributions (when calculating total compensation, an individual participant's compensation is limited to $285,000 in 2020, up from $280,000 in 2019).

Your Contributions Are Tax Deferred For Your Employees

Your contributions to the plan are not taxable to plan participants until withdrawn.

Earnings Accrue Tax Deferred

Earnings accumulate tax deferred and are not taxed to your employees until the benefits are paid.

Distributions from Your Plan May Be Eligible For Special Averaging Treatment

If a plan participant elects to take a lump-sum distribution, the participant's distribution may be eligible for special tax treatment.


Annual Additions to Each Participant's Account Are Limited

Like any other defined contribution plan, the annual additions (contributions plus forfeitures) to each employee's account are limited to the lesser of 100% of compensation or $57,000 (in 2020, up from $56,000 in 2019). This limits the relative amount of funding for highly compensated employees. In contrast, a defined benefit plan may allow a much higher level of employer contributions.

Your Plan Is Subject To "Top-Heavy" Requirements

A plan is considered to be "top-heavy" if more than 60% of the benefits or contributions in the plan are for key employees (generally, the owners and officers of the business). If the plan is top-heavy, you must make a minimum contribution of 3% of pay to the accounts of all non-key employees.

The Plan Is Subject To Federal Reporting, Disclosure and Other Requirements

An age-weighted plan is subject to the federal reporting, disclosure, and other requirements that apply to most qualified plans under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code.

Tip: ERISA doesn't apply to governmental and most church retirement plans, plans maintained solely for the benefit of non-employees (for example, company directors), plans that cover only partners (and their spouses) and plans that cover only a sole proprietor (and his or her spouse).

Allocation of Contributions Depends on a Number of Factors

Age-weighted profit-sharing plan allocations are calculated as the amounts needed, with interest at an assumed rate (set by IRS regulations), to produce benefits at retirement that are nondiscriminatory based on current compensation. A number of factors are considered in determining each participant's allocation, including current age, retirement age, number of years to retirement, present value of dollars at retirement based on an assumed interest rate and current compensation.


An example of how older participants are allocated more money than younger participants in an age-weighted plan compared to a traditional profit-sharing plan is illustrated below:

Example(s): Ron, age 50, and Jamie, age 30, are employed by No Name Enterprises. Ron and Jamie each earn $30,000 per year. The following table shows how Ron and Jamie could receive allocations of a $6,000 employer contribution under a traditional profit-sharing plan and under an age-weighted plan (example assumes a normal retirement age of 65, and interest of 8½%):




Allocation under Traditional Profit-Sharing Plan

Allocation under Age-Weighted Profit-Sharing Plan
















As the example illustrates, with these particular ages of the participants, the older participant, Ron, will receive an allocation five times larger than the younger participant, Jamie, under the age-weighted plan. Under the traditional profit-sharing plan, however, Ron and Jamie will receive the same allocation (since it is based only on compensation and not age as well). If Ron earned more money than Jamie, his allocation would be proportionately greater.

How to Do It

Have a Plan Developed For Your Business

Due to the complex nature of the rules governing qualified benefit plans, you will need a pension specialist to develop a plan that meets legal requirements, as well as the needs of your business. You need to:

  • Determine the plan features most appropriate for your business: Carefully review your business, looking at factors such as your cash flow and profits, tax deduction needed, and current and future expected employee population (tenure, ages, salaries, turnover), to determine plan features, eligibility requirements, etc.
  • Choose the plan trustee (this may or may not be you): The assets of the plan must be held in trust by a trustee. The trustee has overall responsibility for managing and controlling the plan assets, preparing the trust account statements, maintaining a checking account, retaining records of contributions and distributions, filing tax reports with the IRS, and withholding appropriate taxes.
  • Choose the plan administrator: Administering the plan involves many duties, including managing the plan (determining who is eligible to participate in the plan, the amount of benefits, and when they must be paid), and complying with reporting and disclosure requirements. The plan administrator may also be responsible for investing plan assets and/or providing informational and required investment educational services to plan participants. The employer is legally permitted to handle these responsibilities in-house, but plan sponsors will frequently hire a third-party firm or financial services company to assist in performing the functions of plan administration.

Submit the Plan to the IRS for Approval

Once a plan is developed, if it is not a prototype or similar plan pre-approved by the IRS, it should be submitted to the IRS for approval. Since there are a number of formal requirements (for example, you must provide a formal notice to employees), a pension specialist should assist you in this task. Submission of the plan to the IRS is not a legal requirement, but it is highly recommended. See Questions & Answers, below. The IRS will carefully review the plan and make sure that it meets all legal requirements. If the plan meets all requirements, the IRS will issue a favorable "determination letter." If the plan does not meet all requirements, the IRS will issue an adverse determination letter indicating the deficiencies in the plan.

Adopt the Plan during the Plan Year in Which It Is To Be Effective

A corporation "adopts" a plan by a formal action of the corporation's board of directors. An unincorporated business should adopt a written resolution in a form similar to a corporate resolution.

Provide a Copy of the Summary Plan Description (SPD) to All Eligible Employees

ERISA requires you to provide a copy of the summary plan description (SPD) to all eligible employees within 120 days after your plan is adopted. A SPD is a booklet that describes the plan's provisions and the participants' benefits, rights, and obligations in simple language. On an ongoing basis, you must provide new participants with a copy of the SPD within 90 days after they become participants. You must also provide employees (and in some cases former employees and beneficiaries) with summaries of material modifications to the plan. In most cases you can provide these documents electronically (for example, through email or via your company's intranet site).

File the Appropriate Annual Report with the IRS

Most qualified plans must file an annual report (Form 5500 series) with the IRS.

Questions & Answers

What Employees Do You Have To Include In Your Age-Weighted Profit-Sharing Plan?

You must include all employees who are at least 21 years old and have at least one year of service. Two years of service may be required for participation as long as the employee will be 100% vested immediately when the employee enters the plan. If you want, you can impose less (but not more) restrictive requirements.

When Does Plan Participation Begin?

An employee who meets the minimum age and service requirements of the plan must be allowed to participate no later than the earlier of:

  1. The first day of the plan year beginning after the date the employee met the age and service requirements
  2. The date six months after these conditions are met If you want, you can impose less (but not more) restrictive requirements.

What Is A Highly Compensated Employee?

For 2020, a highly compensated employee is an individual who:

  • Was a 5% owner of the employer during 2019 or 2020, or
  • Had compensation in 2019 in excess of $125,000, and, at the election of the employer, was in the top 20% of employees in terms of compensation for that year (this $125,000 amount rises to $130,000 in 2020)

When Do Your Employees Have Full Ownership of The Funds In Their Accounts?

In general, employer contributions either must vest 100% after three years of service ("cliff" vesting), or must gradually vest with 20% after two years of service, followed by 20% per year until 100% vesting is achieved after six years ("graded" or "graduated" vesting).

Caution: Plans that require two years of service before employees are eligible to participate must vest 100% after two years of service.

Tip: A plan can have a faster vesting schedule than the law requires, but not a slower one.

What Happens If An Employee Leaves Before Becoming Fully Vested In His or Her Account Balance?

The unvested amount (called the "forfeiture") is left behind in the plan. Forfeitures can be used either to reduce future employer contributions under the plan, or they can be added to remaining participants' account balances. The Internal Revenue Service (IRS) requires that forfeitures be allocated in a nondiscriminatory manner. This usually requires forfeiture allocation in proportion to participants' compensation rather than in proportion to their existing account balances.

Do You Need To Receive A Favorable Determination Letter From The IRS In Order For Your Plan To Be Qualified?

No, a plan does not need to receive a favorable IRS determination letter in order to be qualified. If the plan provisions (both the written provisions and as implemented) meet IRS requirements, the plan is qualified and entitled to the appropriate tax benefits.

Nevertheless, without a determination letter, the issue of plan qualification for a given year does not arise until the IRS audits your tax returns for that year. By that time, however, it is generally too late for you to amend your plan to correct any disqualifying provisions. Consequently, a determination letter helps to avoid this problem because auditing agents generally won't raise the issue of plan qualification if you have a current favorable determination letter.

What Happens If The IRS Determines That Your Age-Weighted Plan No Longer Meets The Qualified Plan Requirements?

The IRS has established programs for plan sponsors to correct defects. These programs are designed to allow correction with sanctions that are less severe than outright disqualification. If, however, you are unable to correct the defects in your program appropriately, your plan may be disqualified. Loss of a plan's qualified status results in the following consequences:

  • Employees may be taxed on contributions when they are vested rather than when benefits are paid
  • Your deduction for employer contributions may be limited or delayed
  • The plan trust would have to pay taxes on its earnings
  • Distributions from the plan become ineligible for special tax treatment and cannot be rolled over tax free

Do You Have Fiduciary Responsibility For Your Employees' Age-Weighted Plan?

Yes. You have a fiduciary responsibility to exercise care and prudence in the selection and appropriate diversification of plan investments. Your liability for investment returns, however, may be significantly reduced if you allow participants to "direct the investments" of their own accounts. A plan is "participant-directed" if it:

  • Allows participants to choose from a broad range of investments with different risk and return characteristics
  • Allows participants to give investment instructions at least as often as every three months
  • Gives participants the ability to diversify investments generally and within investment categories, and • Gives each participant sufficient information to make informed investment decisions

Note that if you sponsor a participant-directed plan, you assume an additional responsibility — participant education. A balance must be struck between providing not enough — or too much — investment educational support for plan participants. Employee education is an issue to be carefully considered when implementing a qualified retirement plan.

Caution: The Pension Protection Act of 2006 created a new prohibited transaction exemption under ERISA that allows certain related parties ("fiduciary advisers") to provide investment advice (including, for example, recommendation of the advisor's own funds) to profit-sharing (and other defined contribution) plan participants if either (a) the advisor's fees don't vary based on the investment selected by the participant, or (b) the advice is based on a computer model certified by an independent expert, and certain other requirements, including detailed disclosure requirements, are satisfied. The Act also provides protection to retirement plan fiduciaries where an employee's account is placed in certain default investments in accordance with DOL regulations because the participant failed to make an affirmative investment election. These provisions generally became effective January 1, 



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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