Age-Weighted Profit-Sharing Plan

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Age-Weighted Profit-Sharing Plan

A plan by which an employer distributes a set percentage of the company's profits to its employees' retirement accounts, with older employees receiving more. That is, a company sets up a series of accounts for employees and places a portion of its profits in them until employees retire. Under an age-weighted profit-sharing plan, accounts for older employees receive a larger amount each time the company makes a distribution. The company divides up the distributions in such a way that the older employees (who are closer to retirement) and the younger employees (whose account will benefit more from compound interest) will receive the same amount from the profit-sharing following retirement. The idea behind any profit-sharing plan is to give employees an incentive to work for the company's profitability.
References in periodicals archive ?
Cross-tested and age-weighted profit-sharing plans also focus allocations on older employees and are generally less expensive to administer than defined-benefit plans, although deductions are limited to 25% of compensation.
Legislation considered in 1994 would have eliminated age-weighted profit-sharing plans, but the proposal was ultimately deleted.
While a complete review of these regulations is beyond the scope of this article, the new rules on the following topics will be discussed: defined contribution plans; coverage (which is where most practitioners will focus their attention to determine whether a plan or component of a plan satisfies these rules); plan benefits, rights and features; allowing discrimination and coverage violations to be retroactively corrected; and age-weighted profit-sharing plans, an important type of retirement plan whose use will become much more prevalent as a result of these regulations.
This results in higher contribution allocations for older employees, a technique that is becoming known as an age-weighted profit-sharing plan.