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Age-weighted Profit-sharing Plans Can Work to Your Company's Advantage

October 1, 1995
Related Topics: Retirement/Pensions, Variable Pay, Featured Article
What if you have the opposite problem—you're a small employer with a work force that's peppered with older employees, rather than younger workers. There's another plan you may want to consider: an age-weighted profit-sharing plan.

The age-weighted profit-sharing plan allows employers to vary contributions to employees' accounts based on their age, and based on varying profits from year to year. "An age-weighted profit-sharing plan is, quite simply, a defined-contribution plan that wants to look like a defined-benefit plan," says Daniel H. Carlson, a benefits consultant with Buck Consultants Inc. in Chicago. Age-weighted plans can allow variations in allocations as great as 10 to 1, whereas under most typical profit-sharing plans contributions are the same percentage of compensation for all participants.

"Age-weighted plans have drawn some criticism in recent years," says Allen Steinberg, a consultant for Hewitt Associates in Lincolnshire, Illinois. The reason was that some employers were using age-weighted plans to favor highly compensated employees, a practice the Internal Revenue Service didn't take kindly to. Originally, the IRS approved of these plans under its Section 401(a)(4) general nondiscrimination regulations for benefits. The IRS then tried to get rid of age-weighted profit-sharing plans in an early version of the Retirement Protection Act of 1994. So many employers complained, the Act (passed in December 1994) didn't prohibit these types of plans.

As it stands, the IRS' new rules do allow employers to set up age-weighted plans when the plans don't discriminate in favor of highly paid employees.

"The flip side is that age-weighted plans can give you a lot of flexibility to reward people on something other than a flat, uniform basis," says Steinberg. If your work force is generally older, you may want the flexibility to put the bulk of your dollars where they will be nearest to those who are closest to retirement. "These plans allow you some flexibility as an employer to allocate dollars to the people you really need to get money to," says Steinberg.

You see these plans emerge with smaller employers who don't want to go through the headaches of a defined-benefit plan, but who have some key people in the 45-and-over crowd, and the companies want to reward the older workers with a higher profit-sharing allocation than the rank-and-file workers who are just beginning their careers. These plans aren't for everyone. But if your company fits this profile, you might want to look into it.

Personnel Journal, October 1995, Vol. 74, No. 10, p. 36.

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