Business Glossary

plan that combines the simplicity and flexibility of the traditional profit-sharing plan with the best features of the defined benefit plan and the target benefit plan . By age-weighing the plan, higher contributions are permitted by the IRS for older plan participants. Under traditional profitsharing plans, younger employees will have a larger contribution made by the employer on their behalf, but they are the least likely to be concerned with retirement and would rather have the cash.

Age-Weighted Plans offer more flexibility in making contributions. Under defined benefit plans and target benefit plans, a minimum contribution has to be made each year in contrast to the profit-sharing plan. Age-Weighted Plans, as in the case with the traditional profitsharing plans, limit the employer's maximum deductible contribution to 15% of the participant's compensation. The maximum annual contribution of any plan participant is equal to the lesser of 25% of compensation, or $30,000. There are no minimum required annual contributions or maintenance costs to reflect fees paid for the Pension Benefit Guaranty Corporation (PBGC) premiums, federal, or actuarial valuations. A significantly smaller contribution made on behalf of a younger employee will ultimately equal a significantly larger contribution on behalf of an older employee. Because of the effect of compound interest , the contribution on behalf of the younger employee will purchase the same retirement benefit as the contribution on behalf of the older employee.