Chapter 21
CROSS-TESTED/AGE-WEIGHTED PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of cross-tested age-weighted plans
REVIEW:
This chapter discusses age-weighted defined contribution plans, specifically
focusing on the cross-tested variety. The section on when such a plan is
indicated highlights its use for older business owners and key employees.
Following this section, the chapter touches on advantages and disadvantages.
The section on cross-tested plan design highlights disadvantages to using this
type of plan. It then follows up by discussing fixed-formula age-weighted plans –
both profit sharing and target benefit plans. The chapter then covers tax
implications and identifies a few alternatives. Readers are again referred to
chapter 10 for information on how to install the plan, and a reference for more
information is given. The chapter ends with a short question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
What is It?
When Is It Indicated?
Advantages
Disadvantages
Cross-Tested Plan Design
1. Disadvantages of Cross-Tested Plans
Fixed-Formula Age-Weighted Plans
1. Age-Weighted Profit sharing Plan
2. Age-Weighted Pension (Target Benefit) Plan
Tax Implications
Alternatives
How to install The plan
1
Chapter 21
J. Where Can I find Out More About It?
K. Questions and Answers
L. Chapter Endnotes
FEATURED TOPICS:
Cross-Tested Age-Weighted Plans
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
1. Defined contribution
c. Profit sharing
3) Age-based plan
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of cross-tested age-weighted plans
KEY WORDS:
cross-tested plan, age-weighted plan, target benefit plan
DISCUSSION:
1. Discuss situations in which an employer might want to implement an
age-weighted plan.
2. Discuss benefits and problems related to cross-tested plans in general
as compared with fixed-formula age-weighted plans.
QUESTIONS:
1. Which one of the following is a primary objective of cross-tested plans?
a. to provide higher allocations for older plan entrants
b. to guarantee annual employer contributions to meet retirement income
targets
Chapter 21
c. to provide maximum benefits to new/young employees
d. to provide maximum benefits to highly compensated employees
Chapter 21, p. 187
2. Which one of the following would be considered a disadvantage of crosstested plans?
a. too many older rank-and-file employees cause plan costs to be lower than
with alternatives
b. hiring of new employees may make the plan impractical
c. a plan analysis to determine whether it meets cross-testing requirements
must be done at least once every five years
d. such a plan may cause an employer to hire too many older employees
Chapter 21, pp. 189-190
3. Which of the following are true about fixed-formula age-weighted profit
sharing plans?
(1) the percentage of compensation allocated each year to plan accounts can
vary for each employee
(2) the percentage of compensation allocated each year to plan accounts is
fixed for each employee
(3) younger employees often receive a lower percentage allocation than older
employees
(4) such a plan is subject to the Code’s minimum funding requirements
a.
b.
c.
d.
(1) and (3) only
(2) and (3) only
(3) and (4) only
(1) (3) and (4) only
Chapter 21, p.190
4. Which of the following might be considered as alternatives to an ageweighted profit sharing plan while providing many of the same “targeted”
benefits?
(1) 401(k) plan
(2) defined benefit plan
(3) money purchase plans
(4) nonqualified deferred compensation plan
Chapter 21
a.
b.
c.
e.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 21, p. 191
ANSWERS:
1. d
2. b
3. a
4. c