Funding Allocation Methods
| The following example
illustrates permitted funding methodologies that may provide
employers the ability to favor certain employees. The allocations set forth below satisfy all
tax-qualification requirements including non-discrimination and the
top-heavy minimum contribution requirement. |
|
Funding
Allocation Comparison Chart
 |
New Comparability 'Cross-Tested' |
|
Employee |
Age |
Annual Compensation |
Pro-rata |
Integrated |
Age-weighted |
|
Favor Employees A & B |
Favor Employee 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 Company Contribution |
$79,000 |
$73,461 |
$77,288 |
$67,332 |
$53,998 |
|
Employee A’s Share of Contributions |
50.6% |
54.4% |
30.9% |
60.9% |
75.9% |
|
Employee A plus B’s Share |
75.9% |
78.3% |
82.6% |
90.6% |
88.3% |
See Chart
|
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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 method is permissible regardless of participants’
ages. Thus, age-neutral would be appropriate if Employee 'A' were
only 30 years old, whereas
the new comparability formula would not. |
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Please
contact us if you need additional information. If you would
like a specific analysis of your employee census,
please provide the census data [census worksheet] and
email or fax it to us. |
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Information is
provided for review and consideration only. Please consult legal and tax
advisors for
practical advice pertaining to your business and personal situations. This page was last updated
on
Friday, November 14, 2008 09:46 AM
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