Are the contributions age-weighted?
But the nice part about the plans is that you can contribute more as you get older. So annual contributions will increase with age and higher compensation.
Here’s a closer look at how it works…
Let’s assume for example that there are two hypothetical employees who each make $40,000 annually. One of the employees is age 36 and the other is age 56. In theory, they would both have the same retirement balance at 62 years old.
But the 36 year old has many more years until retirement, as compared to the 56 year old. As such, the company would have to contribute a smaller annual amount.
However, the 56-year-old is just 6 years away from retirement age. Accordingly, the company has to make larger contributions to reach the same retirement goal.
This is why the plans can work so well. Most business owners tend to have higher income the older they get. Combine this with the age weighting of the plans and you get the point. Large tax deductible contributions above $100,000 are the norm.
Is there an age limit for cash balance plans? A plan can restrict employees under the age of 21 and can have a one year waiting period for new employees (with the plan entry being January 1st or July 1st).