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Age-Based Profit Sharing

Age-based plans especially appeal to business owners who are older and more highly paid than most of their employees. Like traditional profit sharing plans, employer contributions are flexible, but age-based plans allocate contributions under a formula based on both age and salary, giving older participants a higher percentage of salary than younger ones.
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Who May Establish Sole proprietors, partnerships, corporations, government and nonprofit entities.
Establishment Deadline Tax year-end.
Contribution Deadline Tax filing date, including extensions.
Who Contributes Employer.
Annual Contribution Limit 25% of total eligible payroll (20% for unincorporated business owners), with no more than $275,000 of compensation being taken into account, with individual allocations limited to 100% of pay up to $55,000.
Contribution Requirements Contributions are discretionary each year.
Employee Eligibility All employees age 21 or older who have worked one year (or two years if 100% vesting is provided). May exclude employees who work fewer than 1,000 hours per year.
Vesting Gradual vesting permitted.
Withdrawals Allowed only if certain events occur, such as termination of employment, death or disability. Subject to income tax; a 10% penalty may apply before age 59½.
Loan Feature Permitted.¹
Plan Administration IRS 5500 filings and other ERISA requirements.²

1EGTRRA 2001 made plan loans available to all plan participants.

2IRS 5500-series filings are generally not required for one-participant plans if total plan assets do not exceed $250,000 for the year. (Exception: Filing required for final plan year, regardless of plan size.)

This material is not intended to replace the advice of a qualified attorney, tax advisor, or insurance agent. Before your client makes any financial commitment regarding the issues discussed here, make sure he or she consults with the appropriate professional advisor.