An age-based profit sharing plan is a new type of tax qualified retirement plan which has two very special advantages. Age-based profit sharing plans offer much larger cotnributions for older and highly paid owners and employees and permits the year-to-year discretionary contribution flexibility.
Traditional profit sharing plan contributions are determined based upon compensation without reference to the participant's age. Age-based profit sharing plans use age and compensation in order to allocate contributions. Age-based profit sharing plans permit older and highly paid owners to receive a greater contribution than traditional profit sharing plans.
For example, an owner wants to contribute $20,000 to his age-based profit sharing plan. According to the following assumptions, the $20,000 contribution is allocated among the owner and two other employees based upon an age-based formula and also upon a traditional profit sharing plan formula. The owner would receive an additional contribution of $4,287 in the age-based plan than with the traditional profit sharing plan.
| || Age || Compensation ||Age-Based|
| Difference |
|Employee A||40||$30,000||$2,228||$3,750|| (1,522)|
|Employee B||30||$30,000||$985||$3,750|| (985)|