Question

An age-based profit-sharing plan is a plan in which?

A) younger employees generally receive the greatest allocation.
B) allocations to participants are made in proportion to the participant's age-adjusted compensation.
C) the employer contribution is allocated in such a way that the benefit at retirement is guaranteed.
D) compliance with the nondiscrimination (coverage) rules is tested in accordance with contributions rather than benefits.

Answer 1

An age-based profit-sharing plan allocates contributions based on the participant's age and compensation, with older employees typically receiving a greater share. This contrasts with defined contribution plans such as 401(k)s, where contributions can grow over time to offset the effects of inflation.

Step-by-step explanation:

An age-based profit-sharing plan is a type of retirement savings plan in which allocations to participants are made in proportion to the participant's age-adjusted compensation. This means that older employees generally receive a higher percentage of the contribution based on a combination of their age and salary compared to younger members of the workforce. In contrast to traditional defined benefit plans, which are increasingly rare and offer a set amount upon retirement, defined contribution plans like 401(k)s allow participants to invest contributions with the potential for growth, which can help protect against the erosion of purchasing power due to inflation.