Continental Benefits Group, Inc.
Law Firm of G.M. Morrison, P.C.
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New Comparability, Age-weighted
and Age-neutral Retirement Plan Designs

"New comparability", "age-weighted", and "age-neutral" generally are methods for allocating employer contributions to a profit sharing plan (which may or may not also include "section 401(k)" and "matching contribution" features). In general, these methods replace the usual method of allocating employer profit-sharing contributions (e.g., pro-rata (in which each employee receives an allocation of the same percentage of his or her compensation); or "integrated" (in which contributions are allocated more favorably with respect to income in excess of the taxable wage base)).

New Comparability- Age-Based. Under a new comparability method, contributions are allocated in accordance with a formula set forth in the plan. The resulting allocation must not discriminate in favor of the group of employees classified as "highly compensated" employees. However, discrimination is measured after taking into consideration social security benefits and each participant’s age.

Age-weighted. Under an age-weighted method, contributions are allocated more heavily to older employees. The basis for this method is that each employee receives an allocation equal to the same percentage of his or her current compensation when such percentage is calculated utilizing the value of such allocation at the participant’s normal retirement age.

Age-neutral. The age-neutral method is similar to the new-comparability / age -based method. However, the age-neutral method does not rely and is not dependent on participant’s relative ages. The formula is set forth in the plan and satisfies the discrimination requirement by imputing the employer’s contributions to social security on the participant’s behalf. Permitted formulas generally result on an allocation of 12.25% of compensation to highly compensated employees earning over $205,000, 9% of compensation to half of non-highly compensated employees, and 3% to the remaining non-highly compensated employees.

The following example illustrates the advantage that these methodologies can provide certain employers. The allocations set forth below satisfy all tax-qualification requirements including non-discrimination and the top-heavy minimum contribution requirement.

New Comparability

Formulae

Employee

Age

Compens.

Pro-rata

Integrated

Age-weighted

Benefit or Benefit

A&B A only

A (Owner)

40

$205,000

$41,000

$41,000

$23,882

$41,000

$41,000

B

55

$100,000

$20,000

$17,580

$41,000

$20,000

$6,666

C

50

$40,000

$8,000

$6,687

$10,996

$2,666

$2,666

D

30

$30,000

$6,000

$5,015

$1,556

$2,000

$2,000

E

25

$25,000

$5,000

$4,179

$854

$1,666

$1,666

Total Contribution

$79,000

$73,461

$77,288

$67,332

$53,998

A’s Share of Contributions

50.6%

54.4%

30.9%

60.9%

75.9%

A plus B’s Share

75.9%

78.3%

82.6%

90.6%

88.3%

As you can see, the age-weighted formula is not always appropriate because the age-weighted formula allocates contributions based solely on participants’ relative ages. Because the allocations under the new comparability formula are set by the employer, the resulting allocations perfectly satisfy the employer’s goals and require the minimum overall contribution required by law. While the age-neutral allocation is less advantageous than the new comparability, bear in mind that this allocation is permissible regardless of participants’ ages. Thus, it would be appropriate if A were 30 years old whereas the new comparability formula would not.

Please contact us if you need additional information.  If you would like a specific analysis of your, or your client's, employee census, please download our employee census worksheet and email or fax it to us.

 

Copyright © 2002-2004 Continental Benefits Group, Inc. All rights reserved.
Revised: 09/02/04.