A solo 401(k) plan in which the only participants in the plan are the business owners and spouses of course, the spouses are employees of the business...


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Should Your Successful Business consider an Age-weighted Profit Sharing Plan ?

Traditionally, employer contributions to a profit-sharing plan are allocated to participant's accounts in proportion to the ratio of that participant's compensation bears the total of all participants' compensation.  The maximum annual contribution the employer is allowed to make to the plan is 25% of total compensation.

There is a more equitable variation for allocating the total contribution among plan participants.  It is called an age-weighted profit sharing plan.  As its name suggests, an age-weighted profit-sharing plan is one that takes age into account in the formula for allocating employer contributions as well as relative compensation.  This results in higher contribution allocation for older workers than younger employees.  Most "founders" are older than the other workers.  They, therefore, receive a greater allocation of the employer contribution.  Additionally, the long serving employees tend to also be older, thus, the faithful are rewarded with a larger allocation than workers who are more recently hired.

In order to allocate benefits in an age-weighted manner and still comply with the 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.  The employer contribution is allocated in proportion to each employee's total points.  The result often is the owner is credited with as much as 90% of employer contribution.

This arrangement is not unfair.  For example, the retirement benefit at age 65 for the 50 year old owner will be much less than the retirement benefit of a 25 year old participant at his/her age 65.  There is, indeed, magic in compounded earnings.

Yes, a traditional profit sharing plan can be converted into an age-weighted plan.

Since attempting to adopt an age-weighted profit-sharing plan requires special planning, please do not hesitate to call us to make an appointment so that we can assist you in adopting and implementing this type of plan.

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