Allocating the Profit Sharing Contribution
An employer does not need to adopt a 401(k) plan to find variety on plan design options. There are several types of profit sharing plans available to employers today, all of which are distinguished by the method, or formula, used to allocate the employer's contribution.
Besides the traditional profit sharing plan, there are versions that allow the employer to "weight" contributions in favor of select groups of employees with differing contribution levels based on either age (in the case of age-weighted plans) or status (in the case of new comparability plans). Given their growing popularity, you are encouraged to become familiar with each of the following allocation formulas:
- Non-Integrated — In the context of retirement plans, the word "integrated" usually means the plan takes into account the employer's contribution to Social Security on each plan participant's behalf. In a non-integrated plan, employer contribution amounts are based on each participant's full salary level. That is, an equal contribution percentage of salary is paid to every plan participant.
- Integrated — With an integrated plan, the employer's contributions to Social Security are seen as part of the total contribution. Since Social Security benefits are weighted in favor of lower paid workers, the practical effect of this is to allow employers to direct a commensurately higher share of their plan contributions to the benefit of highly paid workers.
- Points System — In this new design, contributions are based on the plan participant's assigned points within a plan year. Depending on the point system used, points may be computed for each year of service, amount of compensation, and/or the participant's age as of the end of the plan year.
Two other profit sharing allocation designs have proven especially popular with businessowners who are older or who have older employees. They are the age-weighted profit sharing plan and the cross-tested profit sharing plan.
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