Ch. 21 Cross-Tested/Age-Weighted Plan

Question 1

Cross-Tested/Age-Weighted Plan

Answer 1

Allows a higher plan contribution for older plan entrants

Question 2

What is the formula for annual employer contributions based on?

Answer 2

employee’s age and compensation level

Question 3

Employer’s contributions tend to be weighted towards who?

Answer 3

owners and key employees

Question 4

When is it indicated?

Answer 4

• older business owners and key employees of closely held companies
• minimize costs
• max contributions

Question 5

6 Advantages

Answer 5

1. max retirement benefits for older employees
2. older and key employees receive a larger portion of plan allocation
3. tax-deferred savings
4. simple
5. 10 yr averaging
6. participants benefit from good investment returns

Question 6

5 disadvantages

Answer 6

1. limited annual additions
2. employees bear investment risk
3. uncertain benefits because annual contributions are not required
4. must meet minimum funding standards each year
5. may require annual actuarial services

Question 7

Cross-Tested Plan Design

Answer 7

designed to meet nondiscrimination requirements

Question 8

cross-testing rules are _____

Answer 8

complex

Question 9

Cross-testing steps

Answer 9

1. the plan must satisfy a “gateway” requirement
2. project the contribution to each participant’s age of 65 at an assumed interest rate
3. test the projected benefit
4. when more than one HCE, break into “rate groups” to test for nondiscrimination

Question 10

Why can a cross-tested plan be unstable?

Answer 10

the age of new employees can make the plans impractical and necessitate a new plan

Question 11

The plan becomes costly or impractical if it has…

Answer 11

1. a relatively large number of older rank and file employees vs HCEs
2. a relatively large number of HCEs who are young

Question 12

how often do cross testing plans be analyzed?

Answer 12

at least as often as new employees join the plan

Question 13

The plan inhibits the hiring of ____ employees

Answer 13

older

Question 14

3 Advantages of age-weighted profit sharing plan

Answer 14

1. actuarial formula
2. automatically passes cross-testing test
3. reduces complexity and cost

Question 15

2 disadvantages of age-weighted profit sharing plan

Answer 15

1. difficult to communicate

2. younger employees may deem larger contributions

Question 16

a profit sharing plan does not have ….

Answer 16

minimum annual funding requirements

Question 17

3 disadvantages of age-weighted pension plan

Answer 17

1. no guarantee of the fund balance
2. difficult to communicate
3. employers must fund these accounts annually