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

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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%

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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.

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.

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 reviewed and/or updated on Friday, July 03, 2015 05:22 PM

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